The Internal Revenue Service ruled that bonds sold by a Florida community-development district that issued $426 million of debt aren’t tax-exempt, a decision with potential implications for hundreds of similar entities.
Bonds sold to finance Florida housing developments are being issued at the fastest rate in six years as investors seek extra yield from the municipal debt even as 85 percent of such securities have defaulted since 2008.
Municipal-bond defaults, including bankruptcies and the use of reserve funds for payments, may set a record this year as tobacco bonds and AMR Corp.’s Chapter 11 filing push the total to more than double the previous mark, said Richard Lehmann, publisher of the Distressed Debt Securities Newsletter.
Municipal-bond issuers, whose default rate slowed this year, may face more failures in 2011 as federal economic-stimulus aid declines and budget pressures jeopardize debt payments, said Richard Lehmann , publisher of Distressed Debt Securities Newsletter.
Municipal borrowers defaulted at three times the typical rate even as the pace fell from records the past two years when Jefferson County, Alabama, and Lehman Brothers Holding Inc.’s failure sustained historic levels.
Jefferson County, Alabama’s bankruptcy, the largest municipal filing in U.S. history, accelerated the pace of debt defaults by state and local governments, though it still lags behind last year’s rate.
Holders of a Florida development’s tax-exempt bonds are fighting a judge’s order that may make it harder for owners of at least $2.9 billion of defaulted debt to get paid by excluding them from a bankruptcy settlement.