Junk-muni boom sets up historic distress for debt

Dozens of ventures at risk of default; even Graceland isn’t immune.

Businesses that flooded the municipal-bond market with debt sold through government agencies are helping drag the industry into its biggest wave of financial distress in nearly a decade.

The risky corporate ventures aren’t what one typically associates with the $3.9 trillion haven backed largely by states and cities, which are at little risk of defaulting even during economic calamities like the one that’s gripped the nation for the past five months.

But companies eligible for federal subsidies issued tens of billions of dollars of tax-exempt debt in recent years, seizing on a surge of cash into the junk-bond market as investors chased bigger returns. Now, a small but growing number are struggling to repay what they borrowed, threatening to roil that corner of the muni market and add to the corporate bankruptcies piling up across America.

Among those in trouble, there’s a biofuel factory in Maine, the Mandarin Oriental hotel in Washington, D.C., and Graceland, the Elvis Presley shrine in Memphis.

This year, more than 50 municipal-bond issues worth $5 billion have defaulted, the most since 2011, according to Municipal Market Analytics, an independent research firm. Nearly two dozen more have drawn on reserve funds since the start of the year to cover debt payments when revenue fell short.

While the first waves of shutdowns set off a steep selloff in the municipals market in March, high-yield municipal bonds have since fully rebounded, tracking the rally across markets as the Federal Reserve eased monetary policy aggressively. That has caused yields in the state and local debt market to slide to the lowest since the early 1950s, maintaining the low borrowing costs that fueled a record wave of junk-bond deals.

Sales of high-yield debt by state and local government agencies — for projects like nursing homes, charter schools and real estate development — surged by 31% in 2019 to nearly $17 billion, the most since at least 2012, according to Bank of America. More than $10 billion was sold only to big institutional buyers able to handle the risk, according to data compiled by Bloomberg.

Much of the distress tracked by Bloomberg since the pandemic’s spread to the U.S. has come from assisted-living centers and continuing-care retirement communities, both of which are dealing with both the public health and financial challenges of COVID-19.

The hit to tourism and shutdowns of mass gatherings have also taken a toll. In Memphis, fewer tourists have been showing up at Graceland, the museum in Elvis Presley’s former home.

MARK HUMPHREY / ASSOCIATED PRESS Turmoil in the municipal-bond market has extended to such institutions as Graceland, the popular shrine to rock ’n’ roll legend Elvis Presley at his home in Memphis, Tenn.