Muni bond distress higher; defaults mostly from corporate-oriented deals, health care issuers

By Cristal Cody

Tupelo, Miss., Feb. 9 – Distress in the municipal bond market ticked higher in early February with the most defaults in 2024 expected from the corporate health care-related space.

“The broad municipal market is not expecting an increase in defaults when you’re talking about cities, towns, states,” an informed source told Prospect News. “Where the defaults are occurring are in the special financing type areas that are a little more corporate oriented.”

Defaults in the municipal bond space moved higher in early February with 11 defaults reported in the period from Jan. 30 through Feb. 2, up from nine defaults reported in the prior week, according to a note from Piper Sandler & Co.

Eight of the 11 were technical defaults for violations of covenants or an unscheduled draw on credit.

The bond defaults seen in February and January “have a little more corporate orientation than your traditional munis,” a source noted.

One of the recent defaults included a multifamily housing bond from a senior resident facility – “part of the sector than has been under a bit more pressure,” the source said.

“Market costs have gone up, so we have seen some defaults on those types of facilities,” the source said.

On Feb. 1, trustee UMB Bank, NA announced a notice of nonpayment after Tapestry Tallahassee Walden, LLC missed $26 million of interest payments due Jan. 1 on the Tapestry Walden Senior Housing Project series 2017A and 2017B first mortgage revenue bonds.

The bonds carry rates ranging from 6¾% on the series 2017A bonds due July 1, 2037 to 8% on the series 2017B taxable bonds due July 1, 2025. The taxable bonds have been little traded and last were active in October around the 3½ bid area, a market source reported.

The Capital Trust Agency Florida Revenue Tuscan Gardens Senior Living Community defaulted on its series 2015 bonds in December and registered a monetary default on Feb. 2 due to a missed interest payment.

The issuer’s 7% bonds due 2049 were last seen trading on Thursday with a 51 bid handle, up from 48 to 50 bid in January, a source said.

The tranche was issued in a $25.91 million offering on May 20, 2015 at 96.848 to yield 7¼%.

In the week of Jan. 29, five defaults were reported, including a monetary default due to a Jan. 1 missed $38.44 million interest payment from Douglas County Colorado Housing Partnership Multijurisdictional Housing Authority on two tranches of bonds with 5¼% to 5 3/8% coupons.

The series 2021 multifamily housing revenue bonds were issued for the Bridgewater Castle Rock project with proceeds loaned to Bridgewater Castle Rock ALF, LLC for a senior housing facility in Castle Rock, Colo.

The issuer’s 5 3/8% notes due 2041 have been quiet in February since the default and were last seen trading at the close of January on a 74 bid handle, down from where it was issued at 98.493 on Jan. 25, 2021, a market source said.

Other January defaults in the nursing home/senior living and hospital sectors include Canterbury Healthcare Obligated Group and Great Lakes Senior Living Communities LLC, according to a research note from BofA Securities Inc. analysts on Friday.

“We expect defaults emanating from this distress to be concentrated in the nursing home, hospital, and industrial development sectors,” BofA said.

First-time distressed debt reported in January totaled $116 million and was down 11% year over year, while first-time payment defaults declined 70% year over year to $205 million in January, BofA said.

However, the year-to-date total of first-time distressed municipal bond debt is up 5.8% year over year at $1.84 billion, according to the note.

The total cumulative first-time distressed debt since 2019 is $14.6 billion with 37.6% of that total defaulted and 6% exited distressed status, BofA said.

Municipal bond defaults in 2023 totaled $2 billion, according to BofA, which forecasts first-time payment defaults in 2024 at $1.9 billion to $2.3 billion.

Corporate outflows heavy

The muni bond space saw a second year of significant outflows from mutual funds in 2023, which had net redemptions of $15.5 billion for the year, Piper Sandler said.

Mutual funds, banks and insurance companies all reduced their total holdings of municipal bonds in 2023.

Overall total deal volume was lower in 2023 with $379.99 billion of municipal bonds priced, down 2.8% from the prior year, Piper Sandler said.

Taxable municipal bond volume sank 31% to $37.4 billion in 2023 from the prior year and well below the record $146.3 billion priced in 2020.

“We expect taxable volume to remain near historical norms, unless Treasuries reach their 2020 lows when the yield on the 10 year averaged 0.88% to spur renewed interest in taxable advanced refundings,” according to a Piper Sandler note.

Piper forecasts the 10-year Treasury yield declining to near 3% by the end of the year.

Total municipal bond issuance is expected to climb to over $400 billion in 2024.

New money issuance is expected to pick up in 2024 on infrastructure funding needs by states and local governments, along with refunding activity.

The amount of municipal bonds callable in 2024 with coupons of 4½% or higher totals nearly $200 billion, Piper Sandler said.

Year-to-date deal volume through Wednesday totaled $37.6 billion, up 38% year over year, BofA Securities analysts said.

Of the year-to-date issuance, 96% was tax-exempt and 4% was taxable.

Distressed index improves

S&P U.S. High Yield Corporate Distressed Bond index one-day total returns continued to improve on Thursday, closing out higher at 0.78%.

Returns were up from 0.58% on Wednesday, 0.29% on Tuesday and minus 0.53% on Monday.

Month-to-date total returns rose to 0.92% on Thursday from 0.14% midweek, minus 0.44% on Tuesday and negative 0.72% in Monday’s session.

Year-to-date total return losses also narrowed to minus 1.25% on Thursday from minus 2.01% on Wednesday, negative 2.58% on Tuesday and minus 2.86% on Monday.

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