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Bond Accountability Commission 2 Recommendations Page 76

greater default risk profiles than the default risk profiles of the municipal issuers themselves.91 In other words, when a “BBB” or “Baa” municipal issuer, such as CMSD (which is actually a “BBB+” and Baa2” issuer), with a Moody’s municipal rating default risk of


Moreover, much of the default risk among municipal obligations relates to obligations significantly different from general obligation bonds (such as CMSD’s Issue 14 bonds) or revenue obligations of traditional governmental enterprises (e.g., established water and wastewater systems). Therefore, for an issuer such as CMSD, the default risk is even lower than the category average. As stated in UBS Wealth Management Research, “Education Note—Municipal bond defaults and bankruptcy: an overview” at 1-2 (Apr. 2, 2009)— Recent rating agency studies show that default rates for municipal bonds remain low, with much of the risk concentrated in the housing project and health care sectors. Within each rating category, default rates are far lower for municipals than for corporate bonds or any other sector of the fixed-income markets. *** Statistics compiled over the past 38 years show that municipal bonds with investmentgrade ratings (at least BBB- or Baa3) have a record of very low default rates in comparison with virtually every other sector of the fixed income markets. Rating agency default studies show that, during this period, investment-grade municipals as a group have a lower default rate than ‘AAA’ rated corporate bonds. … *** S&P also finds that default rates vary significantly by sector. Of the 39 non-housingrelated public finance defaults between 1986 and 2008 listed in the study, over half are for non-profit healthcare borrowers. S&P recorded 60 housing issue defaults during this period. Most of these defaults were bonds issued to finance multi-family rental housing projects, and of these, 19 were caused by the failure of Executive Life Insurance in 1991 when bond proceeds deposited in Executive Life investment contracts and used as collateral were lost. *** Moody’s published similar studies evaluating the default rates of the municipal securities they rate. The most recent was released in March 2007 and covers the period from 1970 to 2006. Their findings are consistent with those of the S&P studies. The 10-year average cumulative default rate for ‘A’ rated municipal borrowers is 0.03% versus 1.29% for ‘A’ rated corporate obligations. … Moody’s notes that “over 80% of the 41 Moody’s-rated municipal defaults since 1970 are concentrated in the not-for-profit healthcare and housing sectors.” [Footnote omitted.]

BAC2 Recomendations Final 04062010  
BAC2 Recomendations Final 04062010