Fitch Provides Municipal Default and Recovery Expectations by Sector.NEW YORK New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- In a new report 'Default Risk and Recovery Rates on U.S. Municipal Bonds' published today, Fitch Ratings Fitch Ratings
An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has found that most U.S. public finance debt has consistently lower default rates and higher recovery rates than similarly rated corporate and structured finance debt. These lower credit risk characteristics of municipal bonds vary by sector. Fitch has incorporated these lower expected loss levels for public finance debt into Matrix, the new stochastic By guesswork; by chance; using or containing random values.
stochastic - probabilistic stress model it released today (see Fitch Research 'The Fitch Matrix Financial Guaranty As a verb, to agree to be responsible for the payment of another's debt or the performance of another's duty, liability, or obligation if that person does not perform as he or she is legally obligated to do; to assume the responsibility of a guarantor; to warrant. Capital Model') to assess the capital adequacy of financial guarantors, and credit enhancement Credit Enhancement
A method whereby a company attempts to improve its debt or credit worthiness.
Credit enhancements take many different forms. An example of a credit enhancement would be conversion rights added on to a debt instrument in order to lower the issuing levels used by Derivative Fitch to assign ratings to municipal CDOs.
Fitch has concluded that various sub-sectors of municipal debt fit broadly into three classifications of default risk. The lowest risk class consists of general obligation (GO), tax-backed, and most appropriation-backed debt of state and local governments, as well as GO and revenue bonds issued by long-standing, essential purpose enterprises that are either natural monopolies or have strong protections against competition, such as water and sewer systems, public power distribution utilities, public higher education higher education
Study beyond the level of secondary education. Institutions of higher education include not only colleges and universities but also professional schools in such fields as law, theology, medicine, business, music, and art. , and single-family housing revenue bonds. Since the Great Depression, there have been extremely few defaults in these sub-sectors. According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. Fitch's default studies, from 1987-2002, the five- to 15-year cumulative default rates within these combined sectors averaged 0.24%, which was less than the 10-year cumulative default rate of 0.43% for 'AAA' rated global corporate bonds.
The second risk class consists of enterprises that serve essential purposes but are not fully insulated from competition or fluctuations in demand; sectors in this category include hospitals, private higher educational institutions, military, and state multifamily housing, airports, seaports This is a list of the world's seaports: Atlantic Ocean
Investments that have specific interest rates, such as bonds. . The five- to 15-year cumulative default rates within these sectors averaged approximately 0.70% versus the 10-year cumulative default rate of 0.76% for 'AA' rated corporate bonds. The third risk class includes enterprises that must compete against private sector entities or securities with volatile revenue streams. These include industrial development bonds, local multifamily housing, nursing homes and continuing care continuing care
a professional convention that a veterinarian who is treating an animal is obliged to continue treating that case unless an arrangement is made with its custodian to transfer the care to another practitioner or to a specialist. retirement communities (CCRCs), toll roads, and other transportation facilities that lack established traffic patterns, tobacco securitizations, and tribal gaming bonds. These sectors have default risk characteristics similar to corporations, and their five- to 15-year cumulative default rate averaged 3.65% versus the 10-year cumulative default rate of 3.97% for 'BBB+' rated corporate securities.
Fitch believes that these differences in default risk have only been partially incorporated into Fitch's current public finance ratings. In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently , Fitch believes an 'A' rated GO bond will have a lower default risk than an 'A' rated airport, which will have a lower default risk than an 'A' rated corporate or industrial development bond. Nevertheless, Fitch believes that within each of the three classes, ratings accurately represent default risk relativity (i.e. 'A' rated class 2 bonds will default with less frequency than 'BBB' rated class 2 bonds). Fitch adjusts the assumed default rates in Matrix to compensate for this disparity in default risk among the class 1, 2, and 3 bonds. The model uses the assumption that bonds in class 1 will default at a rate similar to corporate bonds rated one full category higher (i.e. a class 1 municipal bond rated 'A+' is assumed to default at the same rate as an 'AA+' rated corporate bond). Class 2 municipal bonds are assumed to default at a rate determined by the midpoint mid·point
1. Mathematics The point of a line segment or curvilinear arc that divides it into two parts of the same length.
2. A position midway between two extremes. between the corporate default rate of the assigned rating and the rating one category higher. Class 3 bonds are assumed to default at the same rate as corporate bonds.
Because of the dearth of municipal bond defaults, recovery data are far from robust. However, available data demonstrate that most municipal sectors have superior recovery prospects to corporate bonds, which have an average recovery rate of about 40%. Fitch considers the recovery prospects of municipal bonds as fitting broadly into six classes. State GO and tax-backed debt is considered the safest in terms of recovery. The second recovery class includes local government GO and tax-backed bonds, federal agency guaranteed debt, public higher education bonds, single-family housing bonds, and bonds issued by transit agencies and water/sewer facilities. The third recovery class includes state and local leases and certificates of participation (COPs), as well as airports and public power distribution revenue bonds. In all of the first three classes, full recovery is expected from a resumption in debt service payments after varying periods of delay, or from a refinancing of the old debt. Fitch is not aware of any state that has permanently defaulted on its GO or tax-backed debt since the Civil War, or of any extended default on a local GO or tax-backed bond since the Great Depression. While there have been cases where issuers have abrogated their COPs or lease obligations, they have been isolated and rare.
The fourth, fifth, and sixth recovery classes consist of securities where enterprises may cease to operate but the bondholder can expect various levels of recovery from the resale value of the assets, as well as securities where bondholders do not have a lien on assets but resumption in debt service may be expected after an extended delay. The fourth class includes bonds backed by nursing homes and CCRCs, private higher education institutions, multifamily housing, public power generating facilities, and parking facilities. Toll roads would also fall into the fourth class, with recovery coming from a resumption of debt service, albeit after a potentially more extended delay than for recovery class 3 bonds. The fifth and sixth recovery classes generally consist of bonds backed by more specialized or single-use assets, with a lower expected resale value, or bonds that may resume debt service payments only after an extensive delay. Recovery class 5 includes military housing and startup toll road bonds. Recovery class 6 includes hospital, private prison, stadium, student housing, and tribal gaming bonds.
While many market participants have expressed that the existing fine credit distinctions within the lowest risk sectors are desirable, Fitch is also aware that the user base of municipal credit ratings has grown beyond the traditional base of individuals, banks, and insurance companies seeking returns on tax-exempt securities Tax-exempt security
An obligation whose interest is tax-exempt, often called a municipal bond, offered by a country, state, town, or any political district. . Many of these new users of municipal credit ratings, such as derivative instrument Noun 1. derivative instrument - a financial instrument whose value is based on another security
legal document, legal instrument, official document, instrument - (law) a document that states some contractual relationship or grants some right counterparties and municipal taxable security institutional investors subject to regulatory capital requirements Capital requirements
Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. , may desire indicators on municipal bonds that measure expected loss on the same scale as other fixed-income investments. In the future, Fitch will seek market input in evaluating the development of supplementary credit indicators aimed at satisfying the needs of these other investors while continuing to serve the traditional municipal marketplace.
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