Auction Supply `Tsunami' Foreshadows Deeper Municipal Losses

[marmar]

from Bloomberg:



Auction Supply `Tsunami' Foreshadows Deeper Municipal Losses

By Michael McDonald

March 3 (Bloomberg) -- U.S. states and local governments may extend the worst slump in municipal bonds on record as they replace as much as $166 billion of auction-rate securities.

California, Boston's biggest hospital and Duke Energy Corp. are converting their bonds to other types of tax-exempt debt after auction failures drove rates as high as 20 percent. The potential supply equals almost 40 percent of the municipal securities sold last year, overwhelming a market that tumbled 4.9 percent last month, according to indexes maintained by Merrill Lynch & Co., which began compiling market data in 1989.

Rates increased last month as investors shunned the securities on concern the insurers that guaranteed the debt may be downgraded, and as dealers refused to buy bonds that went unsold at auctions. The higher borrowing costs are squeezing states and towns just as slowing growth threatens to cut revenue.

``It's a supply tsunami,'' said Robert Fuller, principal of Capital Markets Management LLC in Hopewell, New Jersey, a financial adviser to municipalities. ``All of that is going to be redone and it's going to be redone fast,'' he said of auction-rate bonds.

Twenty-one states face budget deficits in fiscal 2009, including 16 that are short at least a combined $30 billion, according to the Washington-based Center on Budget and Policy Priorities.

Jefferson County

Standard & Poor's slashed the ratings on $3.2 billion of debt issued by Jefferson County, Alabama, to below investment grade on Feb. 29, citing costs from auction-rate and other bonds and interest-rate swaps used to finance its sewer system.

``The county can provide no assurance that net revenues from the sewer system will be sufficient to permit the county to meet the interest rate and amortization requirements of the liquidity facilities,'' officials said in a notice last week. ......(more)

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