Not Bothered
Thomas Chan, chief financial officer at Meritus didn’t respond to a request for comment. Douglas Davenport, CFO at HealthEast said investors placed 11 times as many orders as were bonds available in longer maturities and weren’t put off by commercial banks’ ability to require immediate debt repayment if financial covenants were breached “It didn’t seem to bother them at all,” Davenport said.
Low- and non-rated borrowers have been jettisoning standard security provisions like mortgage liens, which give bondholders the right to foreclose on property in the event of default, and reserves the issuers can tap if they don’t have enough cash to service debt.
“The only way to force those protections back in would be if the deals couldn’t get sold,” said Josh Gonze, who helps oversee $10 billion in munis at Santa Fe, New Mexico-based Thornburg Investment Management.
Rare Defaults
Defaults in the $3.6 trillion municipal market are rare. About 0.2 percent of hospital bonds are in default, compared with 0.005 percent of general obligations, according to Concord, Massachusetts-based Municipal Market Analytics. The rates for retirement projects and charter schools are higher, at 5.4 percent and 1.83 percent, respectively.
The $9.3 billion investors plowed into U.S. high-yield muni funds in 2014 was the second-highest ever, according to Lipper.
It’s unclear how many borrowers in the municipal market -- whose high-yield issuers include Indian tribes, toll roads and some private companies -- have weakened investor protections.
Last month, fund managers clamored to get a piece of Albert Einstein Healthcare Network’s $453.5 million bond deal even though the system had 99.5 days of cash and also didn’t include a reserve as security. Money managers placed more than three times as many orders as bonds available, allowing the Philadelphia-area health-care provider to cut yields, said Chief Financial Officer David Ertel.
Less Cash