Even among nonrated bonds, defaults are generally rare and focused on narrow areas.
Moody’s regularly publishes a study that examines defaults in the rated universe of distressed municipal bonds, but it leaves out a sizable portion of the municipal market that is unrated. To provide clarity on the full municipal market, we conducted our own study using Bloomberg data. Here’s what we found.
With over $3.7 trillion municipal bonds currently outstanding, there are approximately $57 billion in municipal bonds (or 1.5% of the outstanding municipal market) in Bloomberg that are coded as distressed. Distressed in this instance can mean that the issuer fully defaulted on a bond payment, partially defaulted on a bond payment, or is in violation of a covenant (i.e., the debt service coverage ratio is below the set-forth amount).
As the table below indicates, the sector with the largest number of distressed bonds is Tobacco, with $14.2 billion or 23.5% of the total. Such bonds are funded with settlement money and categorized as distressed due to the overall decline in smoking and the fact that some large issuers have drawn on their liquidity reserve funds to pay interest. General Obligation (GO) bonds account for $13 billion or 21.6% of the total. This should not be taken as an indication of poor credit quality in GOs overall; it’s more that names that have received extensive headline coverage for fiscal concerns-Puerto Rico, Detroit and Jefferson County-all have bonds in the category. The Power sector, the third largest ($8.2 billion or 13.6%), is largely composed of Puerto Rico Electric Power Authority (PREPA) debt, which is subject to similar pressures as other municipal issuance from the commonwealth.
| Sector | Par Outstanding | Number of Distressed Credits |
|---|---|---|
| Tobacco Settlement | 14,240,689,199 | 40 |
| General Obligation | 13,061,406,880 | 375 |
| Power | 8,199,925,000 | 244 |
| Other* | 8,140,559,192 | 894 |
| Development | 4,509,884,983 | 543 |
| Water | 2,324,284,636 | 212 |
| Pollution | 1,427,215,000 | 46 |
| Facilities | 1,292,044,000 | 191 |
| Nursing Homes | 1,192,993,593 | 311 |
| Medical | 1,038,405,000 | 232 |
| Multifamily Housing | 1,000,142,118 | 195 |
| Airport | 830,615,000 | 19 |
| Transportation | 755,055,441 | 64 |
| Build America Bonds | 681,670,000 | 6 |
| Education | 445,625,000 | 79 |
| Higher Education | 350,010,000 | 53 |
| Utilities | 341,515,000 | 42 |
| Mello-Roos | 292,915,000 | 126 |
| Housing | 237,733,785 | 29 |
| Single Family Housing | 62,504,423 | 32 |
| School District | 7,880,000 | 10 |
| Bond Bank | 195,000 | 1 |
| Total | $60,433,268,251 | 3,744 |
*Other refers to Special Tax District, Bonds, Tax Increment Bonds and certain Community Development District bonds.
Source: Bloomberg, Neuberger Berman, data as of November 23, 2015.
By definition, high yield municipal bonds carry greater credit risk than their investment grade municipal counterparts. But it bears noting that distressed credits are less common among high yield municipals than their corporate high yield counterparts, where 2.3% of bonds are considered to be distressed. 1 As such, we believe that the municipal market continues to be a good place to add credit risk in exchange for additional yield, particularly among what we would characterize as quality non-investment grade issues. Of course, when investing in higher yield bonds, it is important that investors undertake careful analysis of issuer credit fundamentals as they pertain to long-term payment prospects.
1 As defined by the Merrill Lynch U.S. High Yield Index.
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December 02, 2015, 12:00:00 AM EDT
By Sarah Gehring | Senior Research Analyst, Municipal Fixed Income, Neuberger Berman
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