Muni Bond Defaults Need A louder Alarm
Less than a month before the $43.4 million municipal bond default of Boston based Crosstown Center , some unsuspecting retail buyer purchased $100,000 of the now defaulted bonds. Whats troubling is that this purchase was made just 18 days after a rather cryptic material event notice filed thru the EMMA.org continuing disclosure system.
While we are really thrilled to see the positive strides made by the Municipal Securities Rule Making Board and its rather lovely www.emma.org muni bond continuing disclosure system, the impact of material event notices need to be made clearer to the consumer marketplace. Sure “Material Events” can cover a wide range of topics from benign notices to the Crosstown Center disaster. Even with low muni rates, how and when is a consumer suppose to know to watch their muni bonds for falling trees? How about a rating system for these material events on a 1-10 scale from insignificant to “timber….”. After all what good is a warning bell if no one hears it?
Enough with the complaints. How about a solution? History clearly shows that markets have the intelligence to predict bad news thru market price based rating systems. Some of the larger credit rating agencies even offer these products pricing products. But the consumer market doesn’t seem educated to the benefit of these smart market priced based credit ratings. However, Bondview has built in Market Ratings along with bond pricing of muni bonds and muni rates.
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?
We can only again recommend our esteemed NY Times colleague Gretchen Morgenson’s 10/10/09 article “When Bond Ratings Get Stale”. Within this well penned piece was detailed the most colorful of quotes during congressional hearings with Scott McCleskey, head of compliance at Moody’s from April 2006 to September 2008. He outlined Moodys 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, its only been 7 years.
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.