New York, May 07, 2014 — Municipal bond defaults have increased in number since the financial crisis, but remain extremely infrequent, says Moody’s Investors Service in the report, “US Municipal Bond Defaults and Recoveries, 1970 — 2013.” With seven Moody’s rated defaults in 2013, after five in 2012, there has been an average of 5 defaults per year over the 2008-13 period.
That is much higher than the 1.3 per year average in the preceding 1970-2007 period, but the one-year default rate for municipal issuers remains extremely low. For the last five years it has averaged 0.03%, up from the 0.01% average for the 1970-2007 period.
Since the financial crisis, there has been a shift in the composition of Moody’s-rated defaulters, with general government defaults and bankruptcies on the rise, although few in number. In 2013, there were seven Moody’s-rated municipal defaults, five of which were general government defaults, including the first-ever school district default and Detroit, now the largest US municipal bankruptcy filing. A major not-for-profit healthcare system and a small charter school also defaulted in 2013.
In all, Moody’s rates approximately 15,700 municipal issuers.
“Looking ahead, our outlook for state and local governments is stable, but downside risk will persist in some places,” says Al Medioli, the Moody’s Vice President, Senior Credit Officer who co-authored the report. “This reflects a sluggish and uneven recovery, economic stress on households, demographic trends, and growing pension liabilities.”
Moody’s notes that few issuers are in distress, but those that are remain unpredictable and can be accompanied by a high level of correlation in credit quality across related issuers.
“When credit risk rises in a given region or state, severe stress and default are likely to occur in clusters,” says Moody’s Medioli. “For example, state and local governments share exposures to a dominant pension plan, many school districts are dependent on states for funding and operational mandates, and federal policies may impact entire sectors.”
When municipal issuers do default, there has been a new and growing trend toward more variability in recoveries and also toward lower recoveries, says Moody’s, although they remain generally higher than corporate recoveries.
On average, the ultimate recovery rate for municipal bonds was about 60% for the period 1970-2013, compared with 48% for corporate senior unsecured bonds over 1987-2013. However, individual historical recovery rates of defaulted bonds are highly dispersed, ranging from full recovery to 2%.
In 2013, the three separate recoveries from the Jefferson County, AL and Harrisburg, PA defaults mirrored this trend, averaging 69% but ranging from 100% to 31%. The proposed recoveries for Detroit and Stockton, cities now in Chapter 9 bankruptcy, also vary widely based on creditor class.
For more information, Moody’s research subscribers can access this report at https://www.moodys.com/research/US-Municipal-Bond-Defaults-and-Recoveries-1970-2013–PBM_PBM170048.
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Alfred Medioli
VP – Senior Credit Officer
Credit Policy
Moody’s Investors Service, Inc.
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Anne Van Praagh
MD – Sovereign Risk
Credit Policy
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