Another shot at the municipal market. When all you hear is bad news, opportunity is knocking.
Convention centres, sports venues and other US public facilities that do not provide essential services are a source of potential defaults in the $2,900bn municipal bond market, Fitch Ratings said in a report to be released on Tuesday.
In better times, cities and counties guaranteed the financing for these projects, but, in a downturn, they may struggle or decide not to support them, the rating agency said.
Schools and courthouses are considered to be among municipalities’ core services. But bonds backed by so-called “non-core” services make up about 10 to 15 per cent of the market, estimates Matt Fabian, managing director at Municipal Market Advisors, a research group.
Most are small and relatively obscure, but they have already led to high-profile distress. Problems in Harrisburg, the capital city of Pennsylvania where some officials have warned of bankruptcy, were tied to debt that the city guaranteed for a trash incinerator. When the project’s revenues failed to cover the debt payments, Harrisburg failed to honour guarantees on the debt.
“If a municipality is guaranteeing a project that is outsized and not serving a core function, there is a likelihood that in financial duress, the municipality may not support it,” said Eric Friedland, group credit officer of US public finance at Fitch.
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