Reuters: Bankruptcy News: Weak credit quality of US cities bigger concern than bankruptcies-Morgan Stanley

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Weak credit quality of US cities bigger concern than bankruptcies-Morgan Stanley Aug 8th 2012, 01:06 SAN FRANCISCO | Tue Aug 7, 2012 9:06pm EDT SAN FRANCISCO Aug 7 (Reuters) - Morgan Stanley's municipal debt strategists said on Tuesday that weaker local credit quality should be a greater concern for municipal debt investors than Chapter 9 bankruptcy filings. "Our updated case study analysis of recent Chapter 9 filings affirms that bankruptcies may pick up somewhat, but the ongoing deterioration of local credit quality is a more relevant systemic risk," Morgan Stanley Research's Michael Zezas and Meghan Robson said in a report. "Thus, we reiterate our underweight to local credit and expectation of meager market returns," they added. The researchers said Chapter 9 filings and municipalities flirting with bankruptcy are "likely to remain modest and idiosyncratic." Even so they urged scrutinizing state and local credits, adding that they favor enterprise revenue debt over general obligation bonds. Their review of the recent bankruptcy filings of the California cities of Stockton and San Bernardino, and of Detroit's hard times, points to a "buildup of significant long-term liabilities" as a major reason for their financial troubles. Additionally, severe revenue declines and weak reserves left each city unprepared for the "revenue shock of the Great Recession," the researchers said. While the financial problems faced by Stockton, San Bernardino and Detroit have been extreme, high costs and sharp revenue drops have not been unusual for municipal debt issuers across the United States, the researchers said. "We are averse to state and local credit, and we advocate increased selectivity in GOs (general obligation bonds)," the researchers said. "Structural challenges persist, even under optimistic growth scenarios," they said. "For states, tax growth is unlikely to overcome rising costs from long-term liability burdens and spending mandates while locals face constraints of state aid cuts and weaker tax bases from lower home values." Link this Share this Digg this Email Reprints

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