Municipal Bond Defaults: Lessons from 2020 | Lord Abbett
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Fixed-Income Insights

While defaults were up over 2019, data suggest that the market displayed its historical resiliency in a difficult year.

Read time: 3 minutes

This article is from the forthcoming edition of the Lord Abbett Muni Quarterly.

As the COVID-19 pandemic began to batter the U.S. economy in March and April 2020, municipal bond market observers were quick to register caution. “With local economies grinding to a virtual halt, businesses closed and more than 22 million Americans thrown out of work, the fallout is rippling through the $3.9 trillion [municipal-bond] market,” noted a Bloomberg report from April 17.1 But as we have noted elsewhere, many sectors of the municipal bond market held up relatively well in 2020 amid the market and economic turmoil. While default rates did increase over 2019, the percentage of tax-exempt bonds that defaulted remained quite low as the broad municipal bond market once again displayed historic resilience in the face of sharp economic downturns.

A Closer Look

In 2020, municipal-bond defaults came mostly in high yield sectors and were not reflective of the experience of the larger municipal bond market. Total muni market defaults were up 61% at $2.2 billion; for context, that figure represents only 0.05% of the $3.9 trillion market value of bonds outstanding.2 Defaults have been low in recent years, so they were likely to go up even without the pandemic. Figure 1 shows the breakdown of defaults in 2020 by sector.


Figure 1. Tracking Muni-Bond Defaults in 2020

Defaults by sector

Source: BofA. Data as of December 31, 2020. Data represents percentage of the par value of $2.2 billion in municipal bond defaults in 2020. Development=Industrial development bonds. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.


It’s also worth noting that some of the defaults represented in the chart were caused by factors that were not correlated with credit risk of other tax-exempt bonds. In addition, these deals were likely to default even if there had not been a pandemic and that just about all the defaults in 2020 were similar in that the stress started before the pandemic.

Defaults do not suddenly happen with most municipal bonds. Typically, there is stress for several years where the issuers ask to be allowed to break certain security provisions and use reserve funds to make debt service payments. So, prior to an actual payment default, because we actively manage and surveil our portfolio holdings, we are very aware of the level of stress for issuers and can act accordingly.

To illustrate this point, we highlight two project finance deals that defaulted in 2020. (Lord Abbett has not purchased either of these securities, and this is a sector that we rarely participate in).


This project, located in Willow, Calif., uses rice straw, a waste produce of rice cultivation, to produce medium density fiberboard (MDF) which can used in furniture as an alternative to wood based MDF. CalPlant bonds, $228 million issued in 2017, defaulted in July 2020, after construction delays and cost overruns that were exacerbated by the pandemic, with required modification to the plant’s machinery providing an additional headwind. The bonds were unrated.

The plant was originally expected to open in October 2019 but had already experienced construction delays prior the pandemic. Then, in March 2020, the plant’s startup, and commissioning specialist, from a contractor based in Germany, left the United States due to the pandemic, and could not return to California until August 2020. Construction was finally completed in November 2020. CalPlant made its first boards that month, but production of salable board has not begun due to challenges with straw preparation and refining systems. The equipment supplier will need to make modifications to its equipment starting in February 2021.  Commercial operation is now expected to begin in June or July 2021. However, this could be further delayed if travel from Germany to the United States is hindered by the pandemic.

RePower South

This project, located in South Carolina, takes household trash, aka Municipal Solid Waste (MSW), and converts it into a fuel call ReEngineered Feedstock Fuel (ReEf) that is a coal substitute. The company generates revenue from three sources: Tip fees to take MSW from the County, sale of recyclable commodities (plastics, metals, cardboard, paper), and sales of unrated $43.9 million ReEF Bonds were issued in 2017, and with the expectation to open in mid-2019.

Repower has faced challenges with equipment and obtaining ample feedstock. In mid-2019 the RePower South needed to modify its equipment systems in mid-2019 and needed to raise additional capital.  The 2019 financial statements said there was substantial doubt about the company’s ability to continue as a going concern. The company has a contract in which Berkeley County exclusively delivers all its MSW to RePower South. However, the volumes of MSW feedstock has been insufficient.  The company determined there was substantial uncertainty in its ability to significantly increase MSW volume in a timely manner and there was uncertainty regarding commodity prices. Management has attempted to secure additional MSW Volume. However, the project has not generated enough revenue to pay debt service and which resulted in a payment default in February 2021.

A Final Word

The experience of the two issuers highlighted above shows that there are a range of factors to consider in evaluating municipal bond credits beyond economic and sector conditions. At Lord Abbett, we have developed a rigorous research discipline to assess the credit of individual issuers in the high yield space, with the goal of identifying the characteristics that make these bonds potentially attractive investment candidates—or securities to avoid.


1Danielle Moran, “Muni-Bond Market Is Already Seeing a First Wave of Distress,” Bloomberg, April 17, 2020.

2Based on data from BofA and Bloomberg, as of December 31, 2020.



This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

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