There were no pandemic-related defaults in 2020 among municipal bond issuers rated by Moody’s Investors Service, despite the credit stress created by the unprecedented and wide-scale shutdowns in response to COVID-19.
Municipal defaults and bankruptcies among Moody’s-rated issuers continue to be rare, despite the pressures of the past 18 months, said Moody’s analyst Alfred Medioli, lead author of the 113-page report released Friday.
“Overall, the municipal sector demonstrated continued resilience, benefiting from very healthy reserves, the ability to disconnect spending from revenues, broad federal assistance, and access to liquidity and the capital markets for restructurings,” Medioli said.
The two defaults that did occur in 2020 among issuers Moody's rates reflected underlying credit challenges that predated the pandemic, according to the Moody’s report.
The Archdiocese of New Orleans, rated Caa1 negative, filed for preemptive bankruptcy on May 1, 2020, leading to a July 1 default, though interest rate payments have resumed. The bankruptcy was seen as preemptive as no litigation had been filed against the Archdiocese, which previously had been considered a solid credit with a Baa1 rating, Moody's analysts wrote.
The Virgin Islands Water and Power Authority defaulted through a forced extension of an unrated bond anticipation note maturity. The Virgin Islands BAN default "reflected a long-running series of credit issues that predated the virus, though the island's economy was not helped by the collapse in tourism in 2020," Moody's analysts wrote.
Moody's noted as interesting the continued absence of rated defaults in 2020 due to natural disasters.
Even Paradise, the small California town decimated by the 2018 Camp Fire, has continued to make payments to the pension obligation bond pool financing 2007 Series A-2 issued by the California Statewide Communities Development Authority. Paradise, the pool's largest participant at 39%, "has consistently made its scheduled bond payments through insurance settlements and state backfill of lost property tax revenue, which could have been diverted to other needs," Moody's analysts wrote.
"Paradise has demonstrated that willingness to repay debt can overcome many obstacles, in this case, small scale and near total destruction," Moody's analysts wrote.
Though the percentage of speculative grade credits has grown in recent years, the municipal sector remains very highly-rated overall with generally stable credit quality, Moody’s analysts said.
Municipal defaults are still considered rare despite the handful of widely-covered Chapter 9 bankruptcies over the past decade.
“The average five-year municipal default rate since 2011 was 0.12%, higher than the 0.08% rate for the entire [30-year] study period, but lower than the average five-year corporate default rate of 7.4% since 2011,” said Moody’s analyst Varun Agarwal, who co-authored the report.
The study analyzed the performance of Moody’s municipal ratings and their consistency compared to ratings of global corporates.
In 2020, the one-year rating drift was negative 0.4 notches per 100 credits for municipals compared with negative 22 notches per 100 credits for global corporates.
Municipals also saw less rating volatility in 2020 compared to 2019, with a one-year rating volatility rate of 6.5 notches per 100 credits in 2020 versus 7.7 notches in 2019.
Though the U.S. public finance sector is notable for infrequent defaults and extraordinary stability throughout the study period and municipal bond defaults are rare, Moody’s analysts wrote, the once comfortable aphorism that "munis don’t default,” is no longer credible, as rating volatility, rating transition rates and cumulative default rates have all increased since 2020, though they have stabilized in recent years.
The analysts say they have observed through annual default studies dating back to 2013 that the sector is “evolving in fundamental ways.”
As for 2020, "there is no doubt that U.S. municipal credits rolled with the punches through a unique combination of reserves, proactive debt management direct federal aid and market support," Moody's analysts wrote. "Any 'black swans' from the virus and the related shutdowns may prove to be a slower developing series of tectonic shifts in demographics and behavior."
S&P Global Ratings also released a report last week tracking defaults.
S&P Global Ratings analysts said U.S. Public Finance overall experienced 13 defaults in 2020, 12 in housing and one in higher education, which was slightly above the 10-year average of 11.1 and up from 11 in 2016.
