Texas town is downgraded to junk in wake of default
3 min readA default on debt issued by a Texas town struggling with water scarcity led to multi-notch downgrades into junk by S&P Global Ratings and heightened concern about the impact of climate change on public finance.
Clyde, a city of less than 4,000 in central Texas, failed to make debt service payments due Aug. 1 on combination tax and surplus revenue certificates of obligation sold in 2013 and 2022 and submitted claims to bond insurers that guaranteed payment on the debt.
In
The notices also pointed to
Clyde’s 2022 issue,
S&P on Friday cut the underlying ratings on the two issues to D from A-minus to reflect the default, downgraded the ratings on Clyde’s general obligation and other outstanding debt to B from A-minus, and placed the B ratings on a watch list for potential further downgrades.
“The CreditWatch placement reflects a one-in-three chance we could lower the rating within the next 30 days, during which time we expect to receive more information on the city’s financial operations and performance of the city’s waterworks and sewer system fund and general fund,” S&P analyst Misty Newland said in a statement.
Clyde Mayor Rodger Brown did not immediately respond to a request for comment.
The default is highlighting climate change and how bond insurance can mitigate that risk for investors.
“Clyde’s miss should be a catalyst for a more serious and permanent discussion on the many ways climate change can impact the financial health of issuers in the municipal market even if the financial cost to holders is minimal via the insurance policy,” Municipal Market Analytics said in its latest weekly outlook report, which also pointed to the city’s increased debt load as a contributing factor for the default.
The latest
BAM spokesman Michael Stanton said insurance protected investors with timely payment of interest and principal, as designed.
“Although this is a small exposure, our team is in contact with city officials and their professional advisors and will continue to represent bondholders’ interests in those discussions,” he added.
Robert Tucker, Assured’s senior managing director of investor relations and communications, said “the type of situation Clyde, Texas encountered — unexpected conditions leading to the non-payment of debt service — is exactly what our bond insurance is designed for.”