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Kroll Bond Rating Agency Report Finds US Municipal Bonds Safe from Default Risk

The study, An Analysis of Historical Municipal Bond Defaults, draws on data from more than 8,500 municipal bond defaults occurring during the period between 1929 and 2010. The study examines the causes of the massive wave of pre-war defaults and applies historical lessons to today's environment.

KBRA will incorporate into its methodologies the lessons learned from the Municipal Default Study and will address the on-going challenges facing the municipal market. Its methodologies will include and focus on the ability of a municipality to effectively navigate increasing expenditures on social services, fluctuating revenues, an expected decrease in federal stimulus spending, longterm pension obligations and the need for increased infrastructure spending.

"Market volatility over the past three years has led some to question the fundamental credit worthiness of the U.S. municipal bond market and to predict a wave of upcoming defaults," said KBRA President, Jim Nadler. "Our study finds that widespread municipal bond defaults have not been a feature of the most recent downturn and we do not expect a sharp increase in defaults over the foreseeable future."

The analysis identifies several important structural differences between the municipal bond market of the 1920's and today's municipal bond market. During the Great Depression, rapid growth in the volume of municipal bonds was spurred by the inception of the personal income tax, demand for paved roads accompanying the popularization of automobile travel and the relaxation of World War I controls on issuance. As this research shows, because the majority of Depression-era conditions do not apply to today -- and have not applied for some time -- municipal bonds are significantly safer than some commentators have reported.

"The legacy rating agencies have misread history and have yet to adjust their methodologies to account for recent structural changes in the municipal bond market," said Jerome Fons, KBRA Executive Vice President and co-author of the report.

Other key findings of the report include:

• Prior to World War II, the municipal bond market consisted mainly of issuances by states and cities.
• By a wide margin, the largest contributors to municipal defaults during the Great Depression were U.S. cities. In terms of number of defaults, school districts came in second place, with counties, agricultural projects and municipal special assessment districts also contributing large dollar volumes.
• Bank failures and bank "holidays" contributed to many Depression-era municipal bond defaults. The peak in the default wave coincided with the peak in bank closings.
• A large number of small taxing districts that contributed to Depression-era defaults have since been eliminated or consolidated.
• Revenue sources are more diversified today and federal safety nets protect a large portion of the deposits of municipal issuers.
• Municipal bond issues that have been most problematic in recent times have been concentrated in the industrial revenue, health care and housing sectors.
• The prevalence of easily available bond insurance and bank facilities helped to ameliorate many of the more recent problems encountered by lower rated issuers, as well as allowing greater market access for small issuers.
• Municipalities' ability to navigate pension, OPEB and other social entitlements will be a major factor in determining the strength of the future municipal bond market.

State-by-state analysis found that between 1929 and 1939, 4,816 issuers defaulted on their obligations, affecting nearly $6.5 billion in outstanding debt. Depression-era defaults were also concentrated in a small number of states. Generally, these states exercised little control over local issuers. During and after the Great Depression, Michigan, New Jersey and North Carolina implemented much stricter controls over their local issuers. While the vast majority of the defaults occurred in special districts and small towns, the Great Depression did witness several large defaults by major cities.

A full copy of the report can be found at www.krollbondratings.com.

About Kroll Bond Ratings

Kroll Bond Rating Agency, Inc. (www.krollbondratings.com) is registered with the SEC as a nationally recognized statistical rating organization (NRSRO). Kroll Bond Ratings was established in 2010 to restore trust in credit ratings. Founded by Jules Kroll, pioneer of the modern investigation, intelligence and corporate security industry, the firm provides accurate and timely ratings for bonds issued by financial institutions and large corporations. Kroll Bond Ratings offers a built-in safeguard, namely, the firm is more than 40%-owned by pension funds and foundations. As such, Kroll Bond Ratings is accountable directly to investors. Kroll Bond Ratings operates from offices in New York and Maryland.

Kroll Bond Ratings
Jim Nadler, President
212-702-0707