No Detroit Fallout Across U.S. as GO’s Stage Rally: Muni CreditBrian Chappatta
Detroit’s record bankruptcy filing isn’t derailing the $3.7 trillion U.S. municipal-bond market. Just ask Tom Hamilton, finance director of Norwalk, Connecticut.
The waterfront community about 50 miles (80 kilometers) from New York sold $21 million of general obligations Aug. 1 at a lower-than-expected interest rate to finance roads and a seawall damaged by Hurricane Sandy, said Hamilton, 53. Issuers from Massachusetts to Oregon joined Norwalk last week in offering debt backed by their full faith and credit. The sales defied speculation that such securities would suffer as a result of Detroit Emergency Manager Kevyn Orr’s plan to impose losses on some bondholders.
“There’s not a lot of evidence to show this has been the death knell for G.O. bonds,” said Craig Pernick, senior managing director at Bethesda, Maryland-based Chevy Chase Trust Co., which oversees about $1.1 billion in munis. “They’ve held their own.”
In the eyes of investors nationwide, general obligations have only become safer since Detroit’s July 18 filing. The extra yield buyers demand to own revenue bonds instead of general obligations swelled to 0.96 percentage point July 24, the most since March 2012, Bank of America Merrill Lynch data show. That was up from a gap of 0.77 percentage point June 14, when Orr released his proposal to restructure Detroit’s debt.
The municipal market has already withstood at least two threats since 2008. The financial crisis that began that year led to the collapse of the bond-insurance industry, which once backed more than half of all local debt. In December 2010, banking analyst Meredith Whitney’s incorrect prediction of “hundreds of billions of dollars” of municipal defaults in the following 12 months helped propel 29 straight weeks of investor withdrawals from muni mutual funds.
This year, even as interest rates reached the highest level since 2011, states and cities have sold about $189 billion of fixed-rate bonds, 10 percent off last year’s pace, data compiled by Bloomberg show. Localities from Washington to Alabama plan $8.6 billion in sales this week, the most since April.
Orr’s plan to treat Detroit general obligations the same as retiree health benefits and pensions threatens what investors view as a basic tenet of the municipal market: that cities will raise taxes as high as needed to avoid default on such securities. He offered to repay holders of the debt about 20 cents on the dollar.
No municipality has used bankruptcy to force a cut in principal on general obligations.
Detroit, whose population shriveled by 25 percent from 2000 to 2010, has been rated junk by Moody’s Investors Service since 2009. The city is now Caa3, nine levels below investment grade. By comparison, fewer than 40 of 7,500 local governments rated by Moody’s have a junk rank, said David Jacobson, a spokesman for the New York-based company.
Detroit sought court protection after too few creditors, including bond insurers, investors and city workers, would accept Orr’s offer to repay the $11.5 billion in unsecured debt with $2 billion in borrowed money.
The threat to general-obligation owners nationwide has been “overblown,” said Tim McGregor, who oversees about $30 billion as director of municipal fixed-income at Northern Trust Corp. in Chicago. Most localities have investment grades and won’t miss bond payments because they need access to the market for capital projects, he said.
Last year, three cities in California sought court protection, pushing relative borrowing costs for localities in the state to a six-month high. The yield penalty has since fallen to the lowest since 2008, and the state in January received its first rating increase from Standard & Poor’s since 2006.
Penalizing a neighborhood such as Los Angeles’s Bel Air because of Detroit’s filing is “irrational,” Orr said in a July 25 interview. The community, where Michael Jackson lived, was the fictional setting of the 1990s television show “The Fresh Prince of Bel-Air,” starring Will Smith.
The emergency manager said Detroit raised taxes as high as possible and still doesn’t have the ability to repay investors. That’s not the case for most municipalities.
“Most people realize if you buy sound, quality G.O.s that have the ability to pay, you don’t even get to the willingness question,” McGregor said. “Tax-exempt financing is the cheapest source of financing, a lifeline to all their public-purpose needs.”
Some Michigan localities are struggling to borrow in the wake of Detroit’s filing.
Genesee County postponed a $54.2 million offering planned for Aug. 1. Flint, which also has an emergency manager and is the seat of Genesee, is about an hour’s drive northwest of Detroit.
Michigan issuers have sold a combined $23 million in the two weeks since Detroit filed for Chapter 9 protection, the slowest stretch for the state since January 2012, Bloomberg data show.
Saginaw County, north of Detroit, plans to sell about $61 million of taxable general obligations Aug. 8 in the only long-term deal scheduled from the eighth-most-populous state this week, Bloomberg data show.
“We think we will get positive attention towards this sale,” Robert Belleman, Saginaw’s controller, said in an Aug. 1 interview after Genesee’s postponement. “The county is in strong financial health and has limited outstanding debt.”
S&P may adjust ratings on general obligations from Michigan issuers depending on how Detroit’s debt is dealt with in bankruptcy, Jane Ridley, the New York-based company’s primary Detroit analyst, said in an online presentation last week.
“No one on the Street and no one in retail wants to step up and pay a premium for a Michigan credit right now,” said Michael Camarella, who helps oversee $33 billion in munis for OppenheimerFunds in New York.
“Detroit is an incredibly unique situation and we don’t expect or think it should impact the state or other local communities, which should continue to be judged on their own credit ratings and histories,” Terry Stanton, spokesman for Michigan’s treasurer, said in an e-mailed statement. “Michigan and its local communities will continue to be sound, smart investments.”
Investors were willing to buy bonds from New York’s Albany County last week. The municipality had one more bidder for its $37 million of general obligations than last year, Comptroller Michael Conners said. Proceeds will fund the purchase of a court building.
In Norwalk, which also had an extra bidder than in a 2012 sale, the debt will pay for projects including rebuilding a seawall at Calf Pasture Beach. The city of 87,000 has Moody’s top grade. While benchmark yields rose a full percentage point in the past year, Norwalk’s borrowing costs climbed about half that amount, said Hamilton, the finance director.
“We’re very happy with the sale -- we had a lot of interest in our bonds,” he said. “Although Detroit is a big headline and is a concern for municipal-bond buyers, it had specific factors that aren’t applicable to the broad majority of municipal issuers across the country.”
Issuers this week will borrow at the lowest municipal interest rates since July 24. At 2.87 percent, yields on benchmark 10-year munis compare with 2.6 percent for similar-maturity Treasuries.
The ratio of the yields, a gauge of relative value, is about 110 percent, compared with an average of 93 percent since 2001. The greater the figure, the cheaper munis are compared with federal securities.