WASHINGTON -- The total dollar amount of municipal bonds that went into default or technical default jumped to $4.6 billion in 1991, from $1.9 billion in 1990, the Bond investors Association plans to report next week.
The $4.6 billion figure is equal to about 2.7% of the $170.4 billion in long-term volume estimated for 1991, whereas $1.9 billion equals 1.5% of the $127.9 billion issued in 1990.
"That's real growth" in defaults, said BIA President Richard Lehmann in a telephone interview.
"Volume is up 50% but the [default] rates almost doubled," said Mr. Lehmann, who pointed to this year's failures of Executive Life Insurance Co., Mutual Benefit Insurance Co., and Tucson Electric Power Co. as major culprits. In addition, about 100 housing bond issues defaulted in 1991, he said.
But the figures of the Miami-based investors association, which is the most visible source calculating default rates, have come under controversy because the group lumps technical defaults in with actual defaults.
Analysts and portfolio managers have warned that technical defaults, where interest and principal payments to bondholders have not been interrupted or delayed, should be clearly separated from actual monetary defaults.
But BIA says its purpose is to alert bondholders and potential investors to problems with the bonds they own or are thinking of buying. The group estimates that at least 80% of bonds that are in technical default eventually end up in full default.
"It may be misleading to certain aspects of the financial community," said an aide to Mr. Lehmann. "But it's not misleading to someone considering buying those bonds. They want to be aware of any monetary problem with that issue and a technical default is [frequently] a monetary problem."
She said about $1.3 billion of bonds backed by Mutual Benefit went into default or technical default in 1991, $1.85 billion of Executive Life bonds, $680 million of Tecson Electric, and $1.3 million of housing bonds.
A spokesman for the Public Securities Association said he disagreed with the BIA figures.
"You are comparing defaults of prior issues to current year issuance," said Andy Nybo, a PSA research analyst. "The problem is that people look at those figures and say the default rate for munis issued in 1991 is 2.7%. It's just not accurate. You're comparing apples and oranges. The best thing to do is compare the default to the year in which the bonds were issued and come up with a default rate that way."
He noted that the 1991 figures are an aberration because they are weighted down by the failure of taxable bonds issued in fall 1986 by Executive Life.
"There were some big issues that went" in 1991, Mr. Lehmann said. "Last year, we didn't have a monster issue" like those of Executive Life,k he added.
He said that in 1992 the group expects to see a lot more defaults in housing bonds and in Mello-Roos bonds, which are special district bonds issued in California to fund sewer, lighting, and other improvements in preparation for housing, schools, and other development.
He added that the decline in interest rates is likely to spark a rise in what the BIA has dubbed staged defaults. A staged default, Mr. Lehmann said, is one brought on intentionally by an issuer who refuses to make a scheduled payment to its trustee, thus forcing the trustee to accelerate the bonds. An issuer would do this when it already has arranged substitute financing at lower interest rates or when it knows it can get a refinancing of the issue at lower rates, he said.
"It's irresistible larceny," he said. The bondholder gets hurt because he cannot reinvest the money and get back the same rate of return, he said.
He added that next year could see a default by a major city. "We didn't have one true municipal default of any consequence last year," he said. "But that's really the area where you have potential for a huge increase," such as Philadelphia, New York or New Orleans, he said. "I don't think many of these municipalities are out of the woods yet.
