Katrina = Muni Defaults?

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Sep 11, 2005 4:33 pm

I've been seeing more and more articles concerning possible defaults on muni's issued by cities and/or states affected by Katrina. Of course, in the grand scheme of things, the affected areas' muni's are small (dollar-wise) in comparison to the entire muni market. But still, defaults on even a small percentage of muni's will call into question the integrity of the muni's held by clients, at least, in the client's eyes.


"Oh, but my client's muni's are insured, so I have nothing to worry about." Haven't been following the news, lately? Check out the accounting issues with MBIA, over the last year or so. MBIA has admitted that their accounting of premiums assumes that they will "never have to pay a claim". Statements like that reek of inadequate reserves set aside for future claims.


Prices of (Gulf-area) muni's are expected to drop, when or if any interest payment defaults occur. I agree with the analyst that these price drops will be temporary, but temporary could be 1-2 years or longer. Uninsured muni's issued by (Gulf-area) small municipalities are going to take a big hit and may never recover. (Heck, these municipalities may never even be re-established, as some of them now make up the ocean floor.)


Got a prospect who owns muni's, but won't give you the time of day? Chances are their broker hasn't informed them of the coming turbulence in the muni market. Now's your chance, to get their attention. Call, mail, or conduct seminars. I plan to get ahead of the curve and bring this to their attention.


Don't have any prospects/clients who own "Gulf-area" muni's? Well, the analyst believed that muni prices across the board will decrease; though, not as much as "Gulf-area" muni's. Better you alert them FIRST to the coming storm.


Sep 12, 2005 8:41 am

"I've been seeing more and more articles concerning possible defaults on muni's issued by cities and/or states affected by Katrina."



I haven't seen any. Do you have a link?

Sep 12, 2005 11:00 am

Franklin has a conference call on this with their portfolio managers and a q&a afterwards  

Sep 12, 2005 8:12 pm

sniper1:


"I've been seeing more and more articles concerning possible defaults on muni's issued by cities and/or states affected by Katrina."


I haven't seen any. Do you have a link


------------------------------------------------


The last article I saw was in last week's Wall Street Journal. I had seen several before that one.

Sep 13, 2005 8:04 pm

New Orleans Mayor just announced that the city is "bankrupt". He is requesting state and federal financial assistance. It's beginning to look more and more like across the board muni defaults for New Orleans and maybe certain state bonds. State and Federal financial assistance is iffy.

Sep 14, 2005 10:03 am
doberman:

New Orleans Mayor just announced that the city is "bankrupt". He is requesting state and federal financial assistance. It's beginning to look more and more like across the board muni defaults for New Orleans and maybe certain state bonds. State and Federal financial assistance is iffy.



What was NO's credit rating before the hurricane and what evidence is there that any default problems might spread? Thus far I'm not buying it.

Sep 14, 2005 8:05 pm

The default of New Orleans muni bonds is not a stretch at all. No businesses have reopened; thus, no tax revenue is being generated. How long before New Orleans can generate just half the tax revenue it took in before Katrina? City officials are asking the state and federal government for financial assistance, in the form of a line of credit (loc).


It remains to be seen if the city officials would use the (loc) to fund muni bond interest payments. My guess is that the bondholders will be secondary considerations.


The only hope for bondholders, in my opinion, is for the state and/or federal government to step in and fund the interest payments. What about insured muni bonds? Who knows. Though none of my clients own muni bonds from this area, I've told them that there is likely to be some price volatility in muni bonds across the board, as a result of the spector of potential Gulf-area muni defaults. 

Sep 17, 2005 8:12 pm

Here is a link to an article, from the Bloomberg site, discussing the potential fallout, from Katrina, concerning muni's:


http://quote.bloomberg.com/apps/news?pid=10000039&cid=my sak&sid=aNcsdKcXJTc

Sep 21, 2005 10:00 am

  CHECK THE PROSPECTUS FOR THE ISSUES YOUR CLIENTS OWN.  EVEN IF NOT INSURED, IF INV GRADE OB, MOST LIKELY WILL HAVE AN EXTRAORDINARY REDEMPTION CLAUSE. IF A REVENUE BOND, EX; SUPERDOME, THIS REVENUE PRODUCING FACILITY IS MOST LIKELY INSURED AS WELL, SO A PORTION OF THAT AMOUNT WILL BE ALLOCATED TO SERVICE DEBT.  IF INSURED, NOT MUCH TO WORRY ABOUT.  THOSE THAT ARE IN UNINSURED GO'S COULD FACE SOME PROBLEMS HOWEVER.  HAVE NOT SEEN THE LA MUNIS CHANGE MUCH THOUGH AS FAR AS PRICE AND RATING ARE CONCERNED.  GOOD LUCK

Oct 4, 2005 8:42 pm

The news tonight states that the Mayor of New Orleans (N.O.) is laying off 3,000 city employees. Although the lay-offs are bad enough, what really disturbed me was the fact that the mayor only conceded the lay-offs after he failed to obtain short-term financing for the city.


What does this mean for (N.O.) muni-bond holders if the Mayor can't even obtain short-term financing for the city? I hope the bonds are insured!