Municipal Bankruptcy is a Rare Beast, All Things Considered

Even though Orange County’s 1994 filing was the biggest at the time.

Frank Holmes writes that municipal defaults are “significantly rarer” than those in the corporate world.

Between 1937, the beginning of modern bankruptcy code, and 2008, roughly 600 municipalities out of 90,000 filed for Chapter 9 protection. And even between 2008 and 2012, “only one of every 1,668 eligible general-purpose local governments filed for bankruptcy protection.” Holmes puts that at a 0.06 percent chance, or basically the odds of a human being struck by lightning.

So far, only three local governments having filed in 2015, which would be a stark drop from the twelve filings that 2012 saw. 2012 was the year Stockton, Mammoth Lakes, and San Bernardino all filed.

Holmes goes on to posit that bankruptcy is often more trouble than it is worth, as there is pushback and resistance from just about everybody, citizens, investors, state governments all seem to oppose them on principle. Only 12 states currently allow bankruptcy to be filed with no conditions, and if you are not already aware, California is not one of them.

In one other angle related to the bankruptcy matter, Holmes addressed municipal bonds. The quick take is that any municipal bond class Baa and better has lower default rates than even an Aaa corporate bond. 0.49% of Aaa-rated corporate bonds default, while only 0.32% of Baa-rated municipal bonds default; Aaa-rated municipal bonds come in at a sterling 0.00% default rate.

Oddly enough in all this talk of bankruptcy and default, Puerto Rico is facing a perilous situation after having defaulted with roughly $70 billion in debts. How do territorial bankruptcies work?

The original story can be found here at ValueWalk.


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