Muni market shows strength despite tepid global economy

Municipal bond delinquencies declined in the third quarter, despite some dramatic outliers including Mercy Hospital’s bankruptcy filing in Iowa, and some unrated affordable housing and senior living bonds, Moody’s Investors Service said.

There were only three new municipal bond defaults in the third quarter, compared to nine in the second quarter, Moody’s analysts wrote.

Two of the defaults were unrated: The Tuscan Living Project, a senior living facility, and Residents St. Elizabeth East, an affordable housing project. The third default was precipitated by the Mercy Hospital bankruptcy in Iowa, which was rated Caa3 prior to the August bankruptcy filing and has since been withdrawn, according to Moody’s.

“Municipal bond credit risk remains low overall, though certain sectors, such as competitive enterprises, healthcare and senior living, continue to struggle as inflation and high interest rates linger,” Moody’s analysts Douglas Goldmacher, Sara Jensen, and Jeffrey Berg wrote.

The takeaway from the report is, “larger borrowers with broader revenue streams that represent the bulk of our rated U.S. public sector portfolio remain quite resilient and seldom default,” Moody’s analysts wrote.

“When you get down to the basics of it, [the municipal bond sector] is a very strong, stable sector,” Goldmacher told The Bond Buyer in an interview.

The majority of municipal bonds are stable, because what they fund is built into the fabric of society, so they are able to weather the storm in a way that other sectors cannot, Goldmacher said. While other sectors may need to scale down during an economic slowdown, city functions remain necessary, he said.

The senior living and special purpose district sectors contributed nearly three-quarters of defaults in 2022, and this share is likely to hold for the foreseeable future, because the bulk of U.S. municipal credit risk is in those sectors, Moody’s analysts wrote.

Although the number of credit events remains small, Moody’s said, certain themes persist.

Special purpose districts, accounted for the largest number of issuers with credit events, including defaults, Moody’s said, adding the districts have narrow pledges and little to no support from parent governments, and as a result are the most common borrowers with signs of trouble.

“Senior living and healthcare facilities also show up with some frequency,” Moody’s said. “In many cases, the signs of distress have recurred for years and are idiosyncratic and not related to sector-wide or economic trends.”

Goldmacher declined to predict if more defaults are expected, or if they do, if they would occur in a particular sector.

“The overall number has been small for a very long period of time,” Goldmacher said. “In any given quarter, it’s hard to predict which ones will default, especially since the majority are unrated.”

When bonds are rated, Moody’s has a “tremendous amount of detail” on the credits, Goldmacher said. That doesn’t hold true for unrated bonds, but he also doesn’t want to predict which ones in that category might be higher risk.

Special purpose bonds cover a large variety of different categories, he said. The most common one, and one of the stronger special purpose bonds, originate from a fire district, he said.

Another varietal is bonds issued for an economic development district, which gets its revenue from the increased value of the taxing area, Goldmacher said. With an economic development district, the revenue stream is dependent on the success of the project, while a fire district supports a more stable use and has a more stable revenue source.

“If you take a look at healthcare, it’s worth noting Mercy was having difficulty even before the pandemic,” Goldmacher said. “The pandemic hit the healthcare industry pretty hard, because of the inability to do different types of procedures. But the sector seems to be coming out of it. There is definitely still some pressure, but they seem to be coming out of it.”

As for senior living facilities, some are doing very well, Goldmacher said. It depends on how they are structured and the types of revenue, he said.

“There can be different experiences with senior living facilities even in the same region of the country,” he said. “The pandemic was particularly brutal for the senior living sector. It’s a bit morbid, but they have had a lot of deaths, which left some of them in poor financial shape. Plus, there have been a lot of scandals.”