Impairments set post-Great Recession record in first quarter: MMA

The first quarter of the year saw the highest number of new municipal bond impairments since the Great Recession, according to Municipal Market Analytics, Inc.

There were 47 new impairments eclipsing the previous post-Great Recession peak of 44 in 2019, the firm said in its Default Trends report released Wednesday.

The first quarter’s impairments “continue the trend from last year’s near-record-annual impairment count (178) and imply continuing pressure on high-yield liquidity, underwriting, and performance as technical defaults begin to transition to payment defaults,” the report said.

Of the 47 new impairments, 45 were in what Default Trends defines as risky sectors and 37 were unrated when issued.

Year-to-date new impairments affect $2.45 billion, substantially less than the $9.64 billion of impairments found in the first quarter of 2023. It is also lower than the average new impaired par in the first quarter of the last 10 years, according to Default Trends data.

The highest number were in charter schools (15), the retirement (8), and multifamily (7) sectors.

“Charter schools are still in relatively good condition with increasing enrollment and a per-student funding environment that is modestly favorable,” said Fitch Ratings Senior Director Emily  Wadhwani. “However, the recent roll-off of federal relief funds, together with still elevated labor costs and teacher shortages, are exacerbating operational pressures and leading to some bond covenant violations of late.

“Further, even minor shifts in demographic, competitive, and political dynamics of some markets have made the environment more precarious for some charter schools,” Wadhwani said. “Leadership capacity and strong governance characteristics will be particularly critical as charter schools navigate through the remainder of 2024 and beyond.”

Fitch Ratings Senior Director Margaret Johnson noted that senior living credit quality “is solid overall with independent living occupancy back to pre-pandemic levels, expense pressures abating and favorable demographics supporting fundamentals for the foreseeable future.”

“Despite a handful of defaults in recent years, these are the exception rather than the rule. It is important to note that most of senior living defaults have occurred in the non-rated universe,” Johnson said.

Default Trends declares bonds impaired when there has been a payment default, a use of emergency means to cover debt service, covenant violations, and/or developer insolvency.