By Heather Gillers
The recent surge in Covid-19 cases has brought more bad news for
a municipal bond market already reeling from the impact of
coast-to-coast shutdowns and record unemployment.
On Wednesday, the U.S. Virgin Islands Water and Power Authority
narrowly avoided default. The utility got a badly needed reprieve
when Chicago-based Nuveen LLC agreed to accept a $34 million
payment due Wednesday on Aug. 31 instead.
Analysts question whether the territory has enough money on hand
to make the payment.
The territory isn't alone in facing pressure. Ten municipal
borrowers defaulted for the first time in May and another 10 in
June, the highest for those months since 2012, when borrowers were
still absorbing hits from the 2008 financial crisis, according to
Municipal Market Analytics data.
Many municipal borrowers are being crushed by the massive
falloff in the collection of sales, income and hotel taxes, airport
fees and other revenues. Even some investment-grade issuers are
showing signs of serious strain in their abilities to pay future
Despite the pressure on issuers, some investors are seeing
opportunity rather than a reason for panic.
Even with coronavirus losses weighing heavily on the roughly $4
trillion municipal market, investors are piling back into municipal
debt, hungry for yield and seeking more safety than the stock
market can provide. Many fled munis in droves when the U.S. first
shut down in March, but investors seem to have overcome their
initial fears and have plowed about $11 billion back into muni
mutual funds since mid-May, more than one-third of the amount
withdrawn in March and early April, according to Refinitiv.
Inflows have continued even as some government and nonprofit
borrowers face financial struggles. Universities, convention
centers, student housing, senior living facilities and some
transportation projects are confronting significant revenue
disruptions, and those already in trouble could tip into
insolvency. The Archdiocese of New Orleans, already facing
expensive payouts for sexual-abuse claims, filed for bankruptcy in
May and said in a filing June 26 that it wouldn't make a debt
payment due Wednesday.
Dan Genter, chief executive of Los Angeles-based RNC Genter,
said many of his clients are shifting more of their portfolios into
bonds to avoid the uncertainty and volatility of stocks. But the
stakes of picking which muni bonds to invest in are particularly
high, he said, and the risks include more than default. A bond that
is downgraded to junk can lose 25% of its market value, a concern
for any investor who wants to resell it rather than wait until
"The fire alarm has sounded, and people really need to go look
at their bond portfolios," Mr. Genter said.
High-yield muni funds lost $14 billion in investments during 11
weeks of almost ceaseless outflows from the beginning of March
through mid-May, according to Refinitiv.
Those risky funds are now in their sixth straight week of
inflows and have added back nearly $2 billion. The buying has
pushed up prices, and the S&P Municipal Bond High Yield Index
has regained 68% of its March losses.
Some high-yield borrowers including the Virgin Islands face a
deteriorating financial picture, however, as tourism revenue dries
up. About $345 million worth of debt issued by the junk-rated U.S.
territory sits in Nuveen mutual funds, most of them high-yield. The
debt, whose interest is exempt from all state taxes, also appears
in state-specific funds not listed as high-yield for Arizona,
Kansas, Louisiana, Maryland, New Mexico, Virginia and Wisconsin,
according to records of holdings disclosed by the firm. In the
Wisconsin fund, Virgin Islands debt makes up 4% of total
A Nuveen spokeswoman said most of the debt "is secured by
dedicated tax revenues backed by strong security features." The
Water and Power Authority debt on which Nuveen granted the
two-month extension is held in four high-yield funds, she said.
Virgin Islands Gov. Albert Bryan Jr. said last month that the
pandemic had caused significant shortfalls in revenue collections,
but he still expected to be able "to find ways to streamline
government operations while maintaining an acceptable level of
The many U.S. towns that thrive on local or regional tourism are
in particular distress, and nearly 90% of cities are projecting
budget shortfalls, according to April surveys by the National
League of Cities and the U.S. Conference of Mayors. More than a
third reported they were having to make cuts to capital
improvements, infrastructure maintenance and other critical public
New Jersey's governor and New York City's mayor said this week
they would postpone the planned resumption of indoor restaurant
dining as Covid-19 cases spiked across the country. Even before
those announcements, New York City was expecting to lay off or
furlough as many as 22,000 employees in the fall, and New Jersey
was anticipating a $10 billion budget shortfall over the next two
"The one certainty forecasters can agree on at this point is
that uncertainty lies ahead," said New Jersey Treasurer Elizabeth
Maher Muoio. "Unfortunately, this means we must brace ourselves for
more painful decisions on the road ahead."
The delay in indoor dining meant casinos scheduled to reopen in
Atlantic City this week will have to do so without food or alcohol,
a serious blow to the economy of the city, which narrowly avoided
default in 2016. The value of taxable property in Atlantic City has
been falling since the recession, and the unemployment rate already
topped 8% before the pandemic in February, according to a May
report by Moody's Investors Service, which rates the city's debt as
speculative, or junk, grade.
"It's not a popular decision due to the fact that a lot of
casinos and a lot of restaurants were looking forward to doing
indoor dining this weekend," Atlantic City Mayor Marty Small said
of the delay announced by Gov. Phil Murphy days before the Fourth
of July holiday.
Congress hasn't approved any aid to make up for lost revenue,
and cities and states are suffering massive losses in sales and
income tax collection as the pandemic has driven unemployment to
record levels and eroded consumer spending.
Mikhail Foux, head of municipal strategy at Barclays, said the
widening spread of the virus might inspire more stimulus measures
in Congress, which would help the municipal market.
"The negative might actually become a positive," he said.
Write to Heather Gillers at email@example.com
(END) Dow Jones Newswires
July 02, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.