Municipal Bankruptcy Seen as Rising Problem by NY-Fed, Moody's


For the better part of a year NACM and contributors like Lowenstein Sandler PC’s Bruce Nathan, Esq., have been warning of the potential acceleration of municipal (Chapter 9) bankruptcy as an option for debt-hobbled communities and the potential downstream affects such filings could pose. Within the last week, two notable outfits chimed in on the topic – either directly or indirectly – of municipal defaults, both thinly veiling concern for municipal bondholders.

A new report from the Federal Reserve Bank of New York reveals its analysts found “municipal defaults are far more common than frequently cited statistics suggest.” While some analysts have attacked the assertions of the report as misleading, it has certainly laid the foundation to rile the municipal bond market, thought to be a virtual safe haven in the past.

The row comes on the heels of a Moody’s Investors Services release in which the ratings agency noted it would be reviewing, with additional depth, nearly 100  municipalities for potential downgrades in a state that already has seen three official filings this year. Moody’s also questioned whether a 2011 California law that mandates a 60-day medication between communities and creditors before a Chapter 9 filing can legally go through actually "normalizes" or “condones” partial and/or late-payments to bondholders.  

-Brian Shappell, CBA, NACM staff writer

(Note: More on this story in this week's eNews, available Thursday afternoon at www.nacm.org. NACM presents an Oct. 22 teleconference with Nathan on Chapter 9 bankruptcy. For more information or to register, visit www.nacm.org/calendar/details/435-teleconference-chapter-9.html).

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