![]() Puerto Rico defaults and impairments are not included because they skewer the data for comparison purposes, Fabian said. The disclosure of serious problems that signal the potential for a future payment default are also lumped into the category. It includes situations where covenant violations or technical defaults have occurred. That’s defined as borrowers covering payments through draws from reserves or bond insurance coverage.Īnother category labeled “other” is included in impairments and it’s more broad and subjective. MMA puts payment defaults into the broader impairment category along with a series of other situations that include “support” needed to make the payment. “When we started out it was not to track the riskier stuff, it was to verify that the safe bonds, year to year, remained safe,” and that mostly remains the case, Fabian said. MMA launched its default/impairment tracking system 10 years ago in part to judge whether in fact those credits generally considered safer higher-grade investments remained so and Fabian believes the numbers bear that theory out. “When the credit cycle does turn, defaults will go higher,” he added. “The numbers are higher but not that much higher to a level where investors will become more conservative in how they allocate their dollars” and “they are too small” still to read into them a shift downward in the credit cycle, Fabian said.īut they are concerning and do bear watching, Fabian said. Such strong demand for the yield offered by riskier paper also can result in weakened security features such as covenant tests or reserve cushions. “Some deals are maybe not quite ready for prime time,” Fabian said. The low rates combined with demand means some more speculative deals that might previously have been the subject of direct or private placements are now publicly offered, Fabian said. With rates also remaining so low for a sustained period, some issuers may be persuaded to act sooner rather than later - before a project or financing is fully vetted for its feasibility - rather than risk missing out on the low rates. “The new issue calendar has had a larger number of speculative financings in the last three to five years and because there’s so much demand for high-yield it's encouraging underwriters” to bring the deals. ![]() There’s such a demand for high-yields that it's pulling these bonds into the municipal market,” Fabian said. Rather than signaling that turbulence in the credit cycle may be afoot, Fabian suspects the market environment and rising demand for high-yielding paper in recent years is behind the troubles. 1, MMA noted.Ībout 41% of the newly-reported troubles came from bonds issued in the last three years, said MMA partner Matt Fabian. ![]() ![]() The 108 impairments show “the most new trouble developing among municipal issuers since 2015” when 131 new impairments were disclosed before Oct. Total ongoing impairments being reported were at 671 for the first three quarters, up 11% from last year, according to the data MMA tracks, drawn primarily from the Municipal Securities Rulemaking Board’s EMMA website.
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