Additional tests of municipal bond safety
Annette Thau, former Chase Manhattan bond analyst and author of the bestselling, “The Bond Book”, offers the following additional caveats:“Among GO’s, the weakest credits are found in two groups: GOs of large cities with deteriorating downtown cores and large social outlays, and older, small cities or districts with shrinking populations, a shrinking tax base, and deteriorating economics. Among revenue bonds, the riskiest bonds have been hospitals with strong dependence on government reimbursement (government programs do not cover hospital expenses in full), bonds issued by developers of nursing homes (many of these are highly speculative), and so-called private purpose bonds (also called industrial development bonds, or IDBs). These are issued by specially constituted authorities on behalf of private businesses.”
Summary of requirements
- The municipality must have a minimum population of 10,000
- The municipality must not have a deteriorating downtown, shrinking population, shrinking tax base or deteriorating economics
- The bonds of the municipality must be rated investment grade or higher by each of the various credit rating agencies.
- Revenue bonds must have a debt service coverage ratio of at least two (2), preferably higher.
- The municipal bond issue should carry insurance, especially if dependent upon relatively less stable sources of revenue such as a hospital.
- The municipal bond issue should enjoy relative liquidity unless the investor plans (and is financially able) to hold until maturity.
