WASHINGTON -- Despite growing wariness in the bond market about lease securities, the outstanding repayment record on the $10 billion or more of new lease issues each year suggests that defaults will continue to be rare, according to Standard & Poor's Corp.
An advance copy of a Credit Week Municipal article scheduled for release today runs down the developments in recent months that have raised doubt among investors about the security of lease financings and concludes that none represents a pervasive threat to the market.
Chief among those developments are the default of the Richmond, Calif., Unified School District's $9.8 million certificates of participation, the near-abandonment of certificates issued by Brevard County, Fla., court challenges, and hostile legislative proposals in several states.
The Richmond default is raising legal questions concerning lease issues in California because of the lawsuit that ensued between investors and the state-controlled district, the agency wrote. But the default does not appear to be a symptom of deeper troubles in the market.
Defaults on unrated and uninsured issues, like the Richmond one, have been highly unusual, the agency said, while defaults on higher-grade securities that have been rated or enhanced have been virtually nonexistent.
Agency vice presidents Sally J. Rutherford and Steven H. Nelli in an interview Friday said that a big plus for the leasing market is that the very low default rate held out even during the economic downturn.
Despite the recession-induced pressures the last two years on state and municipal operating budgets, from which lease payments are made, virtually no government delayed or suspended payment on their lease issues, they said.
"Even talk of nonappropriation has been rare," they said, along with agency vice president Jeffrey J. Thiemann, in the article. Nevertheless, investors should be aware in the wake of the Brevard incident that "occasional debates among government officials over whether to appropriate funds to make the lease payments are likely to continue."
The reason leasing "tends to be one of the more controversial financing techniques" in the municipal market is because it "stands outside of the various constitutional debt limits," the officials said.
Voters and lawmakers occasionally question the leasing exception, and legislative proposals are drafted to restrict leasing or place it under the same limits as debt. That occurred in Georgia, New Jersey, South Carolina, and Wisconsin this year, but none of the proposals was adopted, the agency said in the article.
The few proposals to limit leasing that have been approved in recent years were refined and softened as they moved through legislatures so that they only placed procedural limits on the financing technique, the agency wrote.
The controversy surrounding the financing technique also means that the fight to authorize new lease issues in state legislatures and local forums "may become more rigorous," the agency wrote.
Leasing's controversy means that it also is likely to continue being a target of lawsuits. But the agency said that none of the several state supreme courts that recently have entertained suits questioning the validity of leasing on constitutional or other grounds has broadly endorsed those arguments.
Only in two states have the courts ruled that leasing is the same as debt -- New Mexico and Nevada.