In light of the California bankruptcies and the usual belated downgrades comes this nice overview on Municipalities from UBS analysts Thomas McLoughlin and Kristin Stephens, titled Municipal Bonds: City credit quality reconsidered.

They did a screen of credit quality via the Merritt Research database of 284 cities, and note come to the oft overlooked conclusion that all cities are not in the same financial position. Some are healthy, some are middling, and a some are in various degrees of distress. “Most city governments are performing reasonably well in spite of the financial challenges posed by lower property valuations, rising employee benefit costs, and lower state aid.”

To identify the municipalities with the greatest potential for trouble, look for “the weakest liquidity position as of the most recent available audited fiscal year.” This is because a “weak liquidity position is a reasonably reliable indicator of financial stress among city governments and increases the probability of a rating downgrade.”

Of the 284 cities in their sample, approximately 10% exhibit characteristics which may indicate “lower level of financial flexibility” and future downgrades from rating agencies.

Note that downgrades have been outpacing uporades for some time now:




Municipal Bonds: City credit quality reconsidered
Thomas McLoughlin, Kristin Stephens
UBS Wealth Management Research 13 December 2011

Category: Analysts, Credit, Fixed Income/Interest Rates

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7 Responses to “UBS: Not All Municipalities Are the Same”

  1. BennyProfane says:

    Moodys? Really? Haven’t we seen this picture before?

    Meredith Whitney screwed up on her timing, it seems. Let’s see what the situation is in a few years.

  2. ezrasfund says:

    Is this what Meridith Whitney was talking about some time ago? I guess her timing was off a bit, but they can only kick the can down the road for so long. When the Grover Norquist no-tax folks get a hold of local governments; property tax revenues have plunged; pension fund shortfalls are soaring; no one wants to pay off on interest rate swaps gone bad; and (add your own budget crisis builder HERE) something has to give.

  3. constantnormal says:

    Yeah, I look at the Moody’s charts and pretty much dispense with them … not much different that rumors on the web …

    All we need for these pictures to change is another recession, beginning right around the election or early in 2013 …

  4. Aeolus says:

    As investors examine bonds and the funds that hold California Tax Free bonds, it will be interesting to see whether anyone starts looking at the zombie toll road bonds held by the Franklin CA Tax Exempt Funds.

    The San Joaquin Hills Toll Road is a classic Ponzi scheme, where the Toll Road Agency keeps borrowing and refinancing and the total debt keeps increasing.

    Instead of paying back debt, they keep adding new debt every year. In 2011, they refinanced again, deferring interest on one class of bonds, and extending the term by another six years.

    The San Joaquin Hills Toll Road has been under-performing since it was built, and are now operating at 42.5% of the traffic projected when they were built. Even with mandatory toll increases every year, it’s difficult to imagine how they will ever repay these bonds.

    see for some background.

  5. Futuredome says:

    That is because they can’t pay back the debt, which is why they refinance…..hoping. The “toll” should be shutdown.

  6. dead hobo says:

    ezrasfund Says:
    July 13th, 2012 at 12:49 pm

    Is this what Meridith Whitney was talking about some time ago?

    I think a lot of people have just kissed her ass for dissing her about this very thing. Getting the date right is a bitch, but the obvious never stops being the obvious. Except to idiots. Who are now kissing her ass.

  7. Allensm says:

    Very informative article…