The economic consequences of the Covid pandemic have been extensive and are still playing out in the ongoing Federal Reserve monetary policy which is dealing with the inflation induced by the fiscal policies enacted by Washington to counter the pandemic. The economic consequences of the lockdown policies, the supply chain disruptions and the contact restrictions. These policies had immediate severe effects on numerous segments of the municipal bond market beginning with hotels, convention and sports facilities, and retirement facilities.
When I say the affect was immediate and severe, note that the defaults in 2020 jumped from 32 on $1.2 billion to 68 on $4.4 billion, a 267% increase. In addition, the number of distressed issues, issues which are dipping into reserves to make scheduled debt payments, rose from 12 on $337 million to 39 on $3.4 million, a 909% increase. The areas having the greatest impact can be seen from the following table:
• Bond Purpose # $(Million)
• Retirement & Nursing Facilities 32 1,595
• Retail Stores & Malls 15 1,549
• Hotels, Stadiums & Convention Ctrs 7 1,454
• Industrial -Manufacturing 3 626
• Colleges & Universities 9 557
• Airports 5 539
• All Other Purposes 36 1,480
While we cannot be precise in measuring the effect of Covid on these statistics, there are reasons why each of the listed areas would be affected. Many of the ‘All Other Purposes’ were probably affected as well, but to a lesser degree. Hence, another way of supporting the Covid assumption is to look at the default rates in the two years preceding and the two years following 2020. Below is the data:
Defaulted 2018 2019 2020 2021 2022
• # Defaults 31* 32 68 47 27
• $(Millions) 1,106 1,232 4,404 1,767 1,456
• Distressed
• # Issues 4 12 39 32 10
• $(Millions) 50 337 3,439 1,375 777
The numbers reflect the fact that Covid peaked in 2020 but impacted much of 2021 as well. It is consistent that the number of distressed issues continued at a higher rate for a longer period since the recovery was slow in coming and Covid became a convenient excuse to halt interest payments to the trustee by issuers who needed to negotiate better solutions for structural or timing problems with their projects.
As we note in another report, the actual default picture for 2023 has stabilized at pre-covid levels. The greater default risk going forward is losses stemming from government supported green bond projects as well as energy related companies or projects which are being negatively impacted by the environmental politics of today.
*The numbers for 2018 were adjusted to eliminate the First Energy bonds which defaulted in that year due to the closing of coal fired and nuclear energy plants which affected some $1.2 billion in bonds.
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