Predicting that the municipal bond market will soon see a new wave of Chapter 9 bankruptcy filings, a public finance attorney involved in multiple high-profile muni defaults expects to see a fresh round of implosions in the tax-exempt sector this year.
David Dubrow, a partner of Arent Fox LLP in New York who specializes in public and structured finance, is on the lookout for possible Chapter 9 bankruptcy filings by U.S. cities in 2012, especially in the states of Pennsylvania, California, Rhode Island, Michigan, Ohio and Indiana.
Financial analyst Meredith Whitney was taken to task last year by muni market participants after she predicted "significant" muni defaults and "hundreds of billions" in losses for investors. Now, Dubrow, who is closely involved in a series of such defaults, says he can see such a wave coming.
"A lot of medium-sized cities around the country remain under fiscal distress, whether from structural deficits, depressed local real estate markets, an inability to raise taxes, heavy debt loads and especially unfunded pension liabilities," said Dubrow, who heads Arent Fox's Tax Exempt Bond Recovery Group, in a statement.
The group represents major bond insurers such as AMBAC and Radian as well as bondholders and trustee clients in several high-profile muni defaults, including Stockton and Hercules City, Calif.; Harrisburg, Pa.; and Central Falls, Rhode Island.
Dubrow pointed to big-ticket public works, from sewer systems to waste disposal projects to new hospitals, that have ended up costing much more than projected, with less revenue available to cover their costs. The crippling debt for Harrisburg's $280 million incinerator, for example, has weighed on that beleaguered city for years, and last month the city's court-appointed receiver resigned under a cloud.
