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Buyer Beware of States With a High Number of Muni Bankruptcies

Municipal bankruptcies are so rare that bondholders scour each for potential precedents. But they’re far more common in some states than others, according to data from Municipal Market Analytics Inc.

Of the 94 filed since 2007, California saw 16, the second most, MMA figures show. That’s understandable given the most populous U.S. state’s dominance among bond issuers in the $3.8 trillion market and its permissive attitude to such filings, which included the cities of Vallejo, Stockton and San Bernardino.

“An investor has to assume an elevated risk of restructuring,” he said.

Fabian isn’t recommending avoiding debt from the high-bankruptcy states. But he suggests investors demand more in return for the risk, if possible in a market where yields are very low. He also said they should be prepared to do more surveillance on the bond issuer after buying its debt and insist on more disclosures than is typically required beforehand.

Tim Holler