Muni Bond Defaults Need A louder Alarm
This article was updated on January 17th, 2025
Less than a month before the $43.4 million municipal bond default of Boston-based Crosstown Center, an unsuspecting retail buyer purchased $100,000 of the now-defaulted bonds. Troublingly, this purchase occurred just 18 days after a cryptic material event notice filed through the Municipal Securities Rulemaking Board (MSRB)’s EMMA.org continuing disclosure system.
The State of Municipal Bond Transparency
The positive strides made by the MSRB with the EMMA.org muni bond disclosure system are undeniable. Yet, the impact of material event notices remains unclear for many retail investors. “Material events” can encompass topics ranging from routine updates to catastrophic issues, such as the Crosstown Center disaster.
How is a consumer supposed to know when to watch their municipal bonds for signs of trouble? A potential solution could involve a standardized rating system for material events—ranked on a scale from 1 to 10 (insignificant to “timber….”). Without clearer alarms, even low muni bond rates can become risky investments for unprepared investors. After all what good is a warning bell if no one hears it?
The Need for Market-Based Ratings
History demonstrates that market intelligence often predicts bad news faster than traditional credit rating agencies. While major credit rating agencies like Moody’s offer products based on market prices, these tools are often underutilized by retail investors.
Even thought platforms like BondView have developed market-based ratings alongside muni bond pricing and rates to address this gap — here’s an example of a municipal bond portfolio to demonstrate — Education remains key: investors must be made aware of these tools to better protect their portfolios.
What Happened to the Original Rating?
Okay then how about the original rating? The defaulted bonds carried a Moody’s rating of Baa3 when issued in 2002. How is it possible to loose $43 million so fast without the rating agencies even noticing?
A 2009 NY Times article by Gretchen Morgenson highlighted this issue, including congressional hearings featuring Scott McCleskey, a former compliance head at Moody’s. McCleskey detailed instances of muni bonds going decades without updated ratings.
He outlined Moody’s failure to effectively monitor the ratings on thousands of muni bonds held by individual and institutional investors. McCleskey said that “in some cases there were bonds which had been outstanding for 10 or 20 years but which had never been looked at since the original rating. In the case of the Crosstown default, it had only been 7 years.
In recent years, climate change has added another layer of complexity to the municipal bond market. For instance, Hurricane Ian’s impact on Florida demonstrated how extreme weather can strain local budgets, leading to defaults or downgrades in bond ratings.
Florida municipalities faced mounting debt due to recovery efforts, and bonds tied to vulnerable regions saw sharp declines in investor confidence. For investors, this highlights the growing necessity of scrutinizing regional risks, especially in climate-sensitive areas.
Lessons for Investors
In closing, its troubling that somehow Boston is not a “party to the default”and just goes to show that muni bonds really can be a mine field. Even the smart money didn’t see that train wreck coming. Several bond funds including muni bond powerhouse Nuveen, thru its Massachusetts Premium Income Municipal Fund, held Crosstown Center bonds valued at $963,000, according to a recent securities filing. Here are BondView’s yield curves of yesterdays Industrial Development Bonds trades from Massachusetts. They dont look bad now, but a good idea to steer clear of this category if they don’t have the full faith and credit of the municipality behind them.