–Muni Defaults Still Quite Rare
–Pennsylvania Dauphin County:Too Early To Tell Muni Crisis To Spread
–DWS Investments: Concerns Over Munis Have Created Opportunities
–DWS Investments: Value in 20-30Y Premium Coupon A and BBB Muni Bonds

By Yali N’Diaye

WASHINGTON (MNI) – The challenges that Pennsylvania currently
faces with the City of Harrisburg will likely remain an “isolated” case
in muniland, where defaults remain rare, a Treasury spokeswoman told
Market News International.

“We believe Harrisburg to be isolated case and that in general,
defaults of municipal bonds continue to be quite rare, especially for
general obligation debt,” the spokesperson said.

In fact, in comments to MNI from investors, municipalities,
guarantors and rating agencies so far, most see a contained situation
with no systemic risk, although uncertainties remain, especially on
whether Harrisburg opts for bankruptcy.

Generally speaking, growing concerns about the $2.8 trillion
municipal bond market have created opportunities, DWS Investments (part
of Deutsche Bank) head of municipal bond portfolio management Philip
Condon told MNI.

Still, having just filed a complaint — jointly with bond insurer
Assured Guaranty Municipal and bond trustees — against the city of
Harrisburg, Dauphin County is not as categoric as the Treasury in
brushing the possibility of the Harrisburg crisis spreading to other
cities and parts of the country.

“It’s too soon to tell if the crisis will affect or spread to other
municipalities,” a spokeswoman for the Board of Commissioners of Dauphin
County — which includes Harrisburg — told MNI.

Dauphin County has guaranteed a portion of the debt associated with
the Harrisburg Incinerator.

But Moody’s estimates “the city will likely be unable to cover
additional guaranteed incinerator debt service payments due later in the
year, including a $35 million payment due 15 December.”

Still, the rating agency does not see Pennsylvania municipalities
being more at risk than others, declining to comment on whether the
crisis might spread to other parts of the country.

“Moody’s does not believe that PA local governments are more likely
to have more problems than most local governments are having at this
time,” a spokesman told MNI Monday.

The rating agency noted in a report Monday that Dauphin County has
given no indication it would cover the $35 million payment should
Harrisburg fail to do so — a likely outcome by Moody’s account.

“The county has reached out to the City of Harrisburg, most
recently on Aug. 20 with a letter to city officials, to refinance or
restructure the $35 million payment due Dec. 15,” the County spokeswoman
told MNI.

“We have long warned that time is of the essence and that the city
must develop a plan to address the ongoing debt crisis,” she added.
“It’s our hope that an equitable solution is reached.”

Assured Guaranty Municipal, which has filed a complaint with
Dauphin County to force Harrisburg to meet its obligations on defaulted
Authority Resource Recovery Facility Revenue bonds, is also excluding a
scenario where the crisis would spread across municipalities in
Pennsylvania and the rest of the U.S.

“We do not see systemic risk in the municipal market,” an Assured
Guaranty spokeswoman told Market News International Monday.

While investors in the municipal bond market are watching the
outcome of the Harrisburg crisis, growing uncertainties are creating
investment opportunities.

“If Harrisburg did solve its problems through bankruptcy, then
there would probably be an increase in municipal bankruptcies, but that
positive outcome is not considered likely,” DWS Investments’ Condon told
MNI.

In fact, “Even a filing is not considered likely,” he said, adding,
“Many assume Harrisburg is a political struggle both within the City
government and between the City and the State.”

Should the city still opt for bankruptcy, the market impact would
not be significant, Condon anticipates, noting, “Individual
municipalities are always capable of making unsound financial decisions,
ie. Orange Co. CA in 1994.”

“The decision to seek bankruptcy would give the court the power to
make changes that are all ready available to the mayor and city council,
such as, cut services and raise revenue. Thereby taking power away from
the politicians,” the portfolio manager said.

“The usual outcome for GO defaults is full payment to debt,
anything that made it easier for the municipality would be unexpected,”
he said.

Overall, concerns about municipal ratings have created
opportunities, with Condon favoring the 20- to 30-year sector, “because
long maturity municipal bonds are cheap to Treasuries and because A and
BBB rated bonds are cheap to AAA bond.”

As a result, for investors willing to take some risk, 20- to
30-year, premium coupon, A and BBB bonds offer good value.

“The troubled A-rated GO states are a value. They are historically
safe but are struggling because of leak revenues and poor fiscal
management,” he said, although stressing the need to differentiate.

“For the low risk accounts, AAA and AA states GO bonds are
historically safe.”

So, “Short high-quality bonds have little credit risk, but have
very low yields, while many non rated or below investment grade munis
are at risk because of the weak economy,” Condon concluded.

Last week, Harrisburg avoided a default on a $3.3 million general
obligation payment after Pennsylvania Gov. Edward Rendell agreed to
transfer $3.6 million to the City in what Moody’s qualified as a “credit
positive” action.

But as this only provides only temporary relief, the state has
given no indication it will send further assistance.

Later Tuesday, the Security and Exchange Commission will launch its
first of a series of public hearings on the municipal bond market, where
comments on the state of the market form different prospects might
provide additional insight about the state of municipal issuers.

** Market News International Washington Bureau: 202-371-2121 **

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