Standard and Poor’s said municipal bond defaults are down by 69% so far in 2011 from the same point in 2010.
The agency found that in its indexed muni bonds there were roughly $2.4 billion of new municipal bond defaults from Jan. 1 to Oct. 31, 2010. By comparison, S&P noted that in this same indexed group there have been about $750 million of defaults this year through Oct. 31. Both figures are par value.
The figures are based on the S&P Municipal Bond Index, which surveys a sample of muni bonds representing around 44% of the par value of the municipal bond market. With its index S&P includes both rated and unrated bonds.
Standard & Poor’s data includes only monetary defaults — when issuers miss a principal or interest payment — and not technical defaults.
Income Securities Advisors Inc., based in Miami Lakes, Fla., has found a similar 68% decline in defaults when comparing the first nine months of 2011 with the same period last year.
On a different note, S&P reports that the level of outstanding defaulted municipal bonds has remained relatively stable in 2010. Outstanding defaulted munis are those whose defaults have not yet been settled.
As of last Tuesday the rating agency was following 199 outstanding defaulted municipal bonds. By par value this group represents just over 0.5% of S&P’s index.
Analysts offered similar explanations for fewer defaults. “The numbers for 2011 is consistent with normal years …. 2009 and 2010 were extraordinary years,” said Richard Lehmann, president of Income Securities Advisors.
About $5 billion out of $6 billion in Florida community development district bonds are in default, Lehmann added. CDD bonds typically are unrated and are issued to finance real estate development, which is among the riskiest categories of muni debt.
Most of those went into default in 2009 or 2010, so this year there simply was not many of the CDD bonds left that could go into default. That helps to explain why the level of defaults has plunged in 2011, according to Lehmann.
The analyst who did the S&P study offered a similar explanation for the decline. There was a proliferation of land-backed bonds, such as CDD debt, issued in 2005 to 2007 during the real estate boom, said J.R. Rieger, vice president for fixed-income indexes at S&P. Many of these bonds have gone into default since then.
Defaults have fallen in 2011 “because there haven’t been as many land-backed deals in the aftermath of the real estate crunch we’ve had,” Rieger said
The S&P research study also breaks down the defaulted issues by type. Of the 199 outstanding defaulted issues on Tuesday, 8.0% were issued for multifamily residential projects, 10.5% for health care, 43.7% for land-backed deals, 19.6% for bonds sold through conduit issuers, and 18.1% were other types. Looking at the same issues by par value, 2% were multi-family, 9.3% were health care, 24.5% were land-backed, 40.2% were from conduits, and 24.1% were other types. The outstanding defaulted issues total $6.6 billion.
Loop Capital Markets has also been examining municipal bonds defaults. “We’re getting all the squirrelly stuff … the nursing homes. … There’s no evidence of states and cities,” said Chris Mier, Loop’s managing director and strategist.
“Is there going to be widespread government defaults?” he asked. “The fact that I’m not seeing that is a good sign.”
“There’s no big project on the horizon that we see that may default,” Lehman said, adding that he did not expect any significant increases in defaults over the next six months.
When asked about the future of municipal defaults over that period, Rieger agreed. Referring to his study he said, “I think the facts speak loudly.”
