Feb 7, 2023
BofA Sees More Muni-Bond Defaults in 2023 After January Uptick
(Bloomberg) -- Expect more defaults in the $4 trillion municipal-bond market this year, Bank of America Corp. strategists said. Most of the distress will be concentrated in riskier sectors like nursing homes and hospitals.
Muni-bond defaults are forecast to total between $1.7 billion and $2.1 billion in 2023, according to a research note the bank published Friday. First-time payment defaults in January rose 122% year-over-year to $611 million, marking the third highest month since 2019, the note said. Almost all of the defaults were unrated securities in the not-for-profit, nursing home and hospital industries.
The forecast reflects a toughening financial outlook for higher yielding debt that until recently had benefited from an extended stretch of low interest rates, and in some sectors, stimulus money. Most of the credit pain will likely be concentrated among smaller issues.
“Overall things are going to stay strong, but things have been so slow after the stimulus, it’s hard to stay that low for that long,” said Daniel Solender, a partner and director of tax free fixed income for Lord Abbett & Co. “These don’t just happen overnight.”
Despite the anticipated uptick in defaults, it’s been roughly three months since the last Chapter 9 bankruptcy petition by Chester, Pennsylvania, about a month longer than the average length of 52 days between filings since 1982, BofA said. The city near Philadelphia filed in November because of a massive debt to its employee pension funds.
So far this year, the outlook hasn’t dissuaded investors. High-yield municipal bonds have returned 4.8% year-to-date, roughly two percentage points more than the broader market, according to data compiled by Bloomberg.
Hospitals wrestling with covenant problems are “becoming a hallmark of the late pandemic period,” Matt Fabian, partner at independent research firm Municipal Market Analytics, said in a Feb. 1 note. He pointed to Sparrow Obligated Group, a newly impaired hospital borrower seeking a bondholder waiver for its debt service coverage rate test, as an example of recent distress. Fabian expects hospitals to struggle throughout 2023.
Meanwhile, the Alabama Gulf Coast Zoo earlier this year failed to make monthly principal and interest payments due on Jan. 25. The not-for-profit foundation that runs the zoo tapped the market in early 2018 to finance a new facility, but the last two quarters saw revenue drop after inflationary pressure stained attendance.
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