Museum Bonds Default

Smart Money magazine and the  NY Times reported on the  NYC American Folk Arts museum that went bankrupt by defaulting on its muni bonds in Mid August 2010.

We wonder is this the tip of the iceberg? It seems likely with charitable donations will stay down due to a continued slow economy and the tax code phasing them out. We are to  likely see more  problems from  cultural arts programs, specifically museums -which by their nature are  heavily indebted by fixed costs.

In the SmartMoney article, BondView CEO Robert Kane was tapped for his industry expertise and said    regarding the ACA bond ‘s  insurance company wrapper ” ACA’s safety net was once a typical feature of the muni bond landscape, but that many bond insurers bet big on subprime mortgage debt at the behest of ratings agencies, and were battered by the collapse of that debt. The bad news is that this bond is defaulted; the good news is it’s insured,” he says. “But the other bad news is that the insurer ACA is like all the others and is having lots of problems. Pretty much all of these insurers have gone belly up, and the insurance that was underlying a lot of these bonds now doesn’t really exist.”

Thomas Doe, chief executive of Municipal Market Advisors, says bond insurance has disappeared since the crash. “If there’s a benefit, he says it’s that investors and advisors pay much closer attention to the underlying risks of a municipal debt, now that there’s effectively no safety net.”

The market thinks the Folk Art Museum bonds are a high-risk bet, even with the ACA guarantee. An Aug. 6 trade recorded by the Municipal Securities Rulemaking Board showed the bond trading at 61.7 cents on the dollar, with a yield of 10.86%.

The yield curve on museum municipal bonds shows that as a group the marketplace assigns more risk to these bonds compared to  safe sectors like General Obligations. To see the yield curve on all museum bonds, go to this link from  BondView, a free analysis tools for muni bond investors.

Read the full article here.

Good Luck To All