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Global Credit Research - 07 May 2013
New York, May 07, 2013 -- Municipal bond defaults have increased in number since the start of the
financial crisis, but remain extremely infrequent, says Moody's
Investors Service in its annual report "US Municipal Bond Defaults
and Recoveries, 1970 -- 2012." In the period from
1970-2007, defaults of Moody's-rated credits
averaged 1.3 per year. For the 2008-12 period,
however, following five new defaults in 2012, the average
rose to 4.6 defaults per year.
However, the one-year default rate for Moody's-rated
municipal issuers remains very low at an average of 0.030%
for the last five years, compared to the 0.009% average
for the 1970-2007 period and the 0.012% average over
the entire 43-year period of Moody's study.
Of the five defaults in 2012, three were of Moody's-rated
general government bonds. Several other local governments that
Moody's does not rate also filed for bankruptcy during the year.
These numbers are small given that Moody's has approximately 16,000
US public finance ratings, roughly 8,300 of which, or
53%, are on general obligation (GO) bonds.
Although downside pressure in the municipal sector may persist for some
time, Moody's believes municipal defaults will remain few
"Even recently increased default activity remains well within levels
predicted by our present municipal rating distribution," says
Anne Van Praagh, a Moody's Managing Director and Chief Credit
Officer for Public Sector Ratings. "However, risks
are tilted to the downside going forward."
Historically, the majority of municipal defaults?70%?have
been in the healthcare and housing project finance sectors. In
recent years, however, general governments began experiencing
a confluence of economic, financial, and governance challenges
that have been increasing the number of defaults and bankruptcies.
"Growing pension costs, increasing exposure to the capital
markets and changing attitudes towards default and bankruptcies have intensified
credit stress faced by local governments," says Van Praagh.
"Demographic trends may further constrain some local governments'
long-term flexibility, creating an environment with more
downside risks and limited upside potential."
The increase in municipal government defaults is in line with the growing
number of municipal governments that have speculative-grade ratings.
Historical ultimate recovery rates on defaulted US municipal bonds are
generally higher than those on unsecured corporate bonds, says Moody's.
On average, the ultimate recovery for municipal bonds was just under
65% for the period 1970-2012, compared to 49%
for corporate senior unsecured bonds over 1987-2012. However,
municipal recovery rates are highly dispersed across individual bonds,
ranging from full recovery to two cents on the dollar.
For more information, Moody's research subscribers can access
this report at http://www.moodys.com/research/US-Municipal-Bond-Defaults-and-Recoveries-1970-2012--PBM_PBM151936.
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Vice President -- Senior Analyst
Credit Policy Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Anne Van Praagh
Vice President - Senior Analyst
Credit Policy Group
Moody's: Municipal bond defaults have increased since financial crisis, but numbers remain low
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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