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Municipal Bond Forum
FMSbonds, Inc.'s Bond Forum™ is an exclusive opportunity for investors to submit questions and comments on the bond market or to respond to one of our articles.
To participate, just send us an e-mail. Be sure to include your name or initials and your state of residence. Posted e-mails may be edited for length and clarity. If you prefer a private response, please note that in your e-mail. Responses are provided by James A. Klotz, president and co-founder of FMSbonds, Inc., a municipal bond specialist for more than 35 years; Dr. Jay H. Abrams, chief municipal credit analyst; and other members of the firm as noted.
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Despite budget woes, GO pledge strong
11/17/2009I am 61 years old and have a large portion of my retirement portfolio in general obligation Arizona muni bonds. I am concerned about potential defaults due to the budget crisis in Arizona. Most of my bonds are school bonds. Do you have any suggestions?
- S.R., ArizonaIn its most recent review of Arizona's GO rating, Standard & Poor's noted: "In accordance with the Arizona Constitution, the state cannot issue general obligation (GO) bonds. Therefore, the state has historically issued sales tax-, gas tax-, and appropriation-backed debt." Nevertheless, S&P has an “AA” rating with Negative Outlook on the state, reflecting a growing budget gap and lack of agreement on a solution.
School district bonds are generally secured solely by the districts. There is no doubt that most districts are experiencing financial pressures similar to the state itself. With that in mind, however, we still believe that bonds issued as general obligations will be paid before other obligations, as is indicated by the GO pledge.
It is rare to hear budgetary discussions include talk of not paying bonded debt. While this is always possible, we do not see school districts with ratings of “A” or above being in danger of missing debt service payments. “BBB” category general obligations are expected to meet debt service obligations as well, but tend to have thinner financial reserves, less financial flexibility to raise revenues and weaker economies.
You may want to consider diversifying your portfolio so that you are not overly reliant on any one municipal bond sector. In any case, we still rely on more than 100 years of history that has seen municipal bonds maintain one of the strongest records for repayment of any investment asset class. Although times are tough, we still believe bondholders of "essential" public service bonds can expect to receive the interest and principal payments that they are entitled to.
NC housing bonds
11/16/2009First, what do you charge to buy bonds? Second, we bought NC Housing Finance Agency Home Ownership Revenue Bonds 1998 Trust Agreement, rated AA2. We paid $970 per bond and purchased $100,000. The bonds are selling at $940 but have an interest of 5.20%, and we have already received $10,400 in interest in two years. The cost does not concern us. We will not sell these bonds and will pass them on to our children. I am 95 and my dear wife is 83. We have more than $300,000 in cash and want to buy more of the same, but would like your feelings about their safety, even though they are rated AA2. (Cusip 658207HH1.) Your comments will be surely appreciated.
- J.A., North CarolinaThe North Carolina Housing Bonds that you asked about are rated in the “AA” category by both Moody's and Standard & Poor's. S&P indicates they believe North Carolina Housing's single family home ownership is conservatively run. A check on the latest disclosures regarding this bond shows only 12 loans out of a total of 653 to be delinquent for either 60 or 90 days. Additionally, only four loans were in foreclosure as of June 30, 2009, the date of the report. This appears to be a strong credit that has performed very well in the current economic crisis. That said, you might want to diversify your holdings so that you’re not too exposed in the housing sector to the exclusion of other municipal bond types.
All prices on our Web site are net to the investor. There are no additional fees or costs. Naturally, as with all bond purchases, there is interest to be paid that has accrued since the last semi-annual interest payment.
Insurance coverage
11/11/2009I hold some Xenia Rural District Water Bonds 98410ACE3. I live in Florida. The water district is having financial problems. The issue sells for 60% to 70% on a dollar of par. The district is talking about selling itself for 50 percent on a dollar of liabilities. The issue is protected by Assured Guaranty. How will it work if the district is sold for less than $143 million with the insured bonds totaling $85 million? Based on the strength of the insurance company, does the company make up the difference to par with any lost?
- J.S.,FLBond insurance covers the face amount of the bonds.
Typically, in a distressed situation, the issuer will pay the portion of the debt service it can, leaving the remainder to be made up by the bond insurer.
If water rates are raised, or other corrective action is taken, the issuer may be able, once again, to resume full debt service payments.
Insurers also have the option to pay off the entire issue in default. In such cases, they will pay the full face amount of bonds outstanding.
This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.