Municipal Bond Forum

I 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., Florida

In the prepaid gas contracts, is the utility able to treat the entire block of prepaid gas as an asset and “rate base it”? I suppose that would only be relevant to regulated gas utilities? Also, have you ever heard of this structure being used to sell blocks of electricity at a fixed price?

T.A.

I hold a 10-year laddered portfolio of Maryland state and county bonds. All are rated “AAA” to “A.” Does it make sense to diversify to other high quality states to reduce risk? Does losing my in-state tax advantage of 7.5% offset multi-state diversification?

D.M., Maryland

How can you show Jefferson County, Alabama, sewer bonds with a “AAA” rating when the county is going down the sewer into bankruptcy? You should not even be offering such bonds for sale, much less representing their quality.

T.S., Nevada

I have been told that certain municipal bonds contain a clause that requires the issuer to pay bond debt before all other local expenses. Is this the case? If so, how can I decide which offerings have such a clause?

J.N., Iowa

I have recently invested in municipal bonds through your firm and a Vanguard long-term, investment-grade bond fund. My goal is to achieve distributions of at least 5%, as I plan to retire at the end of this year. My concern is that the value of the investments will go down once the economy recovers. What is the outlook for interest rates to increase and bond values to retreat?

B.E., Illinois

You say, “Today, the ability to research a bond issue and have the necessary financial disclosure documents available have never been more important,” and “… investors should seek out a bond specialist to provide the vital research required to make intelligent investment decisions.” From this, might we deduce that a bond recommended by my FMSbonds agent Jason Berwick should be further researched? Each time I consult my Edward Jones broker, his reply is simply, “It is not in our system,” indicating that it is therefore not reliable. It is quite confusing.

D.B., Missouri

There has been much dialogue about commercial real estate being the next implosion on the markets and the devastating effects it could render. Certainly muni bonds that rely on real estate taxes and probably sales taxes may be suspect acquisitions at this time. What is the consensus thinking at FMS on this subject?

C.M. New Jersey

What is the nature of the insurance that insured municipal bonds carry?

A.K., Michigan

Prior to the credit crisis, Nouriel Roubini predicted a muni market meltdown due to expected plunging revenues for muni issuers from reduced property, sales, income and capital gains taxes. This has occurred, and continues to occur, yet defaults are still minimal. Don’t you expect weak counties, cities’ lack of access to the markets and reduced income to be the next shoe to drop? Defaults were common in the 1930s when circumstances were similiar. It seems to be a “head in the sand” approach you are advocating in the face of potential massive deterioration in muni revenues. Where will debt service and principle payment come from?

R.T., Colorado