![]() ![]() Catholic dioceses, the PG&E utility and the Boy Scouts of America. Regarding the one Moody’s-rated default, triggered in early May by the Archdiocese of New Orleans’ bankruptcy, the report noted that the filing, apparently preemptive and defensive, illustrated a new trend, with other examples of such being actions by nearly 20% of all U.S. Of the two muni defaults in 2020, one was rated and the other was “by a Moody's rated entity albeit on an unrated instrument”. Likewise when compared to the five-year CDR of 6.89% for global corporates over the same time period. The five-year all-rated cumulative default rate (CDR) of municipal bonds throughout the study period (1970-2020) was unchanged at 0.08% and still remains very low. The report drew attention, once more, to the fundamental difference between municipal and corporate credits. Muni Bond Defaults and Bankruptcies Remain Rare In relation to the pandemic, Moody’s notes that the muni market experienced a “very unique set of stresses stemming from the virus-related shutdowns, and these have unleashed a series of new dynamics that will shape municipal finance going forward.” These include the “rapid acceleration” of remote learning and work and, associated with these, movement away from high-density employment and living. Once again, an important “observation” noted in this year’s report was that over the 50-year study period: “ny one default may only reflect the idiosyncrasies of that individual credit, and not be representative of a general sector trend.” While there were municipal ratings downgrades during the year, global corporates’ ratings’ downgrades were more frequent. (Indeed, during the period of significant market stress during 2020 resulting from Covid, there were only two municipal defaults and neither were virus related.) Second, muni bonds continue to be highly rated compared to corporates. First, while they may have become more common over the last 10 years, municipal defaults and bankruptcies still remain rare overall. In addition to emphasizing their resilience in the face of the COVID-19 (“Covid”) pandemic, the report continues to affirm two hallmark benefits offered by muni bonds. Despite these concerns, pledged revenue legally secures its bonds and state law prohibits a Chapter 9 bankruptcy, so bondholders face little real risk.At the beginning of July, Moody’s Investors Service released its annual municipal bond market snapshot, US municipal bond defaults and recoveries, 1970-2020, with updates through 2020. New York’s MTA experienced a dramatic decline in ridership that’s projected to cause a $3.2 billion shortfall in 2020 revenue and a $5.8 billion shortfall in revenue next year.While the city has identified some solutions, one-time measures alone may not be sufficient to address the projected shortfalls next year. Chicago’s budget challenges have worsened due to the pandemic with a nearly $800 million budget deficit in 2020 and a projected $1.2 billion budget gap next year.High yield muni bonds have staged their own comeback but spreads remain higher by comparison. The spread between high quality muni bonds and Treasuries fell to 126%, far more normal than March levels. ![]() Highly rated bonds outperformed lower rated bonds throughout most of the year as investors sought to de-risk their portfolios.Tax revenue has fallen across many states, but GO bonds remain relatively safeguarded in comparison to revenue bonds. In fact, nursing home and industrial development revenue bonds account for more than two-thirds of all muni bond defaults in 2020. General obligation (GO) bonds outperformed revenue bonds.
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