What Does the Harrisburg, PA Bankruptcy Mean for Muni Bonds?
This week, Harrisburg, PA filed for Chapter 9 bankruptcy protection. Pennsylvania’s capital city was facing $458 million in creditors and claims and a state takeover, according to media reports. The City Council voted 4-3 to seek bankruptcy protection for Harrisburg, which has a debt burden five times its general-fund budget. This imbalance was blamed on the “incinerator from hell”— a waste-to-energy incinerator, the renovation of which created $310 million in municipal debt. In December 2010, Pennsylvania declared the city financially distressed. Including Harrisburg, six communities have filed for bankruptcy in 2011.
Here are some considerations regarding Harrisburg’s financial troubles for existing and prospective investors:
- Holders of the incinerator bonds should continue to receive principal and interest payments due to insurance that was purchased from Assured Guaranty upon the issuance of those bonds.
- Harrisburg’s financial difficulties may be somewhat unique. With an entire budget of less than $60 million, the city incurred more than $300 million in debt over a failed incinerator project. The imbalance is perceived to be an isolated incident.
- Municipal bond prices recently have been driven down (and yields driven up) for a variety of reasons. In trading on Wednesday, October 12, 2011, prices for tax-exempt bonds finished mostly lower, with yields on AAA-rated, 10-year municipal bonds up three basis points to close at 2.53% on Municipal Market Data’s benchmark triple-A scale. In contrast, yields on 10-year U.S. Treasury notes closed at 2.23%.
- Diversification continues to be the prudent course. Bond investors should never over commit to any single issuer.
