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A bond’s-eye view of the world

Chad Rach
Portfolio manager/investment analyst
Based in:
Los Angeles
Investment experience:

CHAD RACH: There was an article this morning in The Wall Street Journal: “Muni blues worry investors.” Many of you may have seen it. And it describes this bankruptcy phenomenon that we’re seeing, particularly here in California — Stockton, San Bernardino, Compton, Mammoth Lakes, maybe others, either filing for Chapter 9 or flirting with it — that that’s really a big-time negative event for our market. I’d actually take a much different view on it. I actually think it’s a very positive development for our market for two main reasons, one of which [is that] I think it’s going to drive a lot of clarity in terms of the bankruptcy process.

As many articles as we’ve all read over the last couple years about what happens in Chapter 9 for municipalities, I think we have to take that with a huge grain of salt, because we just don’t have the body of work — we don’t have the [number] of cases, really, at least in modern times — to understand what actually happens in a modern-day municipal bankruptcy. So I think there’s a big learning potential for all of us participants in the market to see actually what happens.

I think we might find out some interesting conclusions. We might find out that for some lenders and bondholders, it’s absolutely a non-event — that it’s OK if your entity files for Chapter 9 — and you may get paid in the ordinary course. We may find out that certain other classes of securities that otherwise were considered extremely safe over many decades will be subject to some major impairments. So I think we’re going to learn those things coming out of it. [It’s] kind of exciting, at least for a muni-bond geek like myself. It’s kind of high times, if you will.

I think it’s going to really solidify the notion that credit and research matter in our marketplace. We may have gone through, again, a long period of time where the view is “Municipalities always pay.” But the fact of the matter is, we’ve got literally thousands of individual governmental unities that issue debt, and I think what we’re finding out now is they have different paths in terms of how they’ll handle their creditors. And to me, that’s extremely exciting, because what that tells me is there are opportunities to add a lot of value: picking the ones that do well — that survive, that continue to pay — and trying to do our best credit research to avoid the ones that really try to cram down their bondholders and other creditors.

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