The fact they defaulted is what the market remembers.” The executive, who spoke on condition of anonymity, said struggling issuers get no tangible benefit from skipping payments on an insured obligation over an uninsured one since any money must eventually be repaid to the insurer. The market does not care whether a bond’s insured or not. “I’m not sure it’s correct to say issuers are deciding to default on insured bonds over uninsured ones. “We don’t feel picked on,” said a senior executive at a bond insurer. Insurers do not appear to perceive an immediate risk. Insured bonds, which accounted for 57.3 percent of muni issuance in 2005, sank to only 5.5 percent of issuance in 2011, according to Thomson Reuters data. After the financial crisis, so-called monoline insurers left the business, and the largest remaining insurer, Assured Guaranty, is scaling back, depending on states’ bankruptcy laws. In addition, the once-widespread use of insurance on new issuance has shrunk to a sliver of the muni market. Syncora Guarantee Inc last month told a federal judge in Alabama that the prospect of it having to make good on millions of dollars a month in debt payments owed by bankrupt Jefferson County might sink the company. Some of the companies are starting to feel the pressure. Hercules, which had considered bankruptcy, reached a settlement this month with Ambac after defaulting on a $2.4 million bond payment due in February. Wells Fargo & Co is the trustee on each of the debt issues and has filed a lawsuit against Stockton for missing its February 28 payment on its $32.8 million of 2004 parking facilities debt, said bank spokeswoman Elise Wilkinson. The city of Stockton, nestled among the farms of California’s Central Valley, is defaulting on about $2 million in bond payments for debt sold in 2004, 20. ![]() “In order to do that I need sufficient cash flows.” “My first concern as receiver is to maintain vital and necessary service in the city,” he said. “I was aware they were insured bonds when we made the decision,” David Unkovic, the receiver, told Reuters, adding that the city’s financial condition was more important than bond-holders. A breakdown of defaults on insured munis was not available. So far in 2012, there have been 21 muni defaults totaling $978 million, versus 28 defaults totaling $522 million for the same period in 2011, said Lehmann, who sees the number rising. “Municipalities are saying this is what bond insurance is for - bond holders get paid,” said Richard Lehmann, publisher of Distressed Debt Securities Newsletter. ![]() The California cities of Stockton and Hercules, as well as Pennsylvania’s capital, Harrisburg, have opted to default on some of their insured debt in recent months. But defaults on insured bonds are putting pressure on these insurers, which never fully recovered from the last decade’s financial crisis. So far, the bond defaults are not roiling the $3.7 trillion municipal market because insurance companies are stepping in to make payments to bond holders in some cases. cities are choosing to fund essential services like public safety and garbage collection over making payments on their outstanding debt, as rising costs and falling revenue deplete their budgets.
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