For years, municipalities have been kicking the proverbial can down the road, hitching bonds, pension and revenue estimations to over-optimistic expectations of home prices’ appreciation—and, by direct extension of this, over-inflating their tax projections. If Meredith Whitney is to be believed, the United States is still facing potentially hundreds in billions of dollars of municipal debt defaults from coast-to-coast that could cripple the American economy.
It remains to be seen whether hedge funds’ appetite for discounted municipal debt and the potential years-long negotiations that would result in a necessary payout will be sufficient to support American towns with ill-managed budgets. While Thursday’s Houlihan Lokey Municipal Restructuring event in New York was certainly populated with plenty of hedge fund professionals, there is a built-in expectation that private equity firms, too, will invest in municipal debt (loans can achieve tax-exempt status, providing a little more flexibility to lenders) to take advantage of opportunities to invest in certain regions.
Municipalities with a greater percentage of graying residents and the biggest pension commitments may be forced through legal proceedings to divest real estate and infrastructure to investors to remedy budgetary malaise, said Houlihan Lokey Co-CEO Jeff Werbalowsky. However, because many of these jurisdictions are home to political processes (and judges, keep in mind!) that have long been influenced by things like local unions and constituency complaints, Werbalowsky suggested potential investors in munis take into account political climate. Specifically, he cautioned prospective muni investors against taking positions in “blue states” that are home to majority Democratic lawmakers that tend to have union-friendly voting records.
“In a red state, I think they’ll do fine,” he told event attendees.
It isn’t easy to put on a conference for nearly three hours covering municipal debt and keep your audience from becoming restless. But Houlihan Lokey’s original presentation strategy kept the audience rapt. Even Werbalowsky at one point donned a judge’s wig and robe to adopt a fictitious character, drawing chuckles from attendees.
Now, as Greece’s creditors look to wring a staggering $50 billion from the debt-riddled country’s real estate holdings, consternation has developed among perhaps rightfully upset Greeks who say they don’t want national treasures and landmarks sold to foreign bidders. But, if both Houlihan and Whitney, separately, are to be believed, this is the future that dozens, if not hundreds, of U.S. municipalities face. Inevitably, local governments and those dependent on their worn infrastructure and under-funded liabilities will bear the brunt of any potential Chapter 9 filing. For investors, they will not have to only evaluate a debtor’s capacity to repay debt. It seems they must also brace for that region’s political climate when weighing investments. Wall St. just got done healing up from years of lashes absorbed on Capitol Hill. Are deal makers ready to get berated in statehouse and county council meetings, next?