Landscape of municipal market still uncertain following Lehman, Merrill crises

By Cristal Cody and Sheri Kasprzak

New York, Sept. 26 - The impact of recent market woes was felt immediately by the municipals market, where deal after deal has been delayed as issuers wait for the dust to settle and the new landscape to emerge.

The response from several issuers has been the same - uneasiness in the markets following the bankruptcy of Lehman Brothers, Bank of America's buyout of Merrill Lynch and the federal takeover of American International Group is cause for concern, enough so for deals to be postponed.

Some market sources are holding onto hope that the sector returns to normalcy - but with issuers hesitant to hit the market, they're sitting on the sidelines.

Issuers have postponed more than $7 billion in fixed- and variable-rate bonds since the market shakeup.

"We're all sitting around waiting to hear," a sellsider said after an Oregon sale was postponed, along with other issues across the country. "Let's just hope it returns to some normalcy. Things have a tendency to go back and return to calm, but it's a whole new brave world."

Waiting until October, November

Offerings planned for mid-September have now been pushed back to October and even November.

"Investors right now are in more of a wait-and-see attitude and a couple of deals have been taken off the table just because there hasn't been investor interest [after] the events over the last few days," said another source.

Smaller firms may cushion business

So what will the landscape look like once all the buyouts and bailouts are completed?

"It's hard to say," said one sell-side source reached Friday.

"I don't think anything on this scale has ever happened before, so it's hard to go on experience. I have a feeling everything is going to be fine.

"There are enough boutiques out there that it probably won't shake things up too badly. It's just going to take time for things to settle back down and for everyone to get back to business."

Defaults a worry

Other market insiders say they're less concerned about the number of underwriters out there for muni offerings than they are about the continued fallout from the subprime mortgage fiasco that nearly crippled bond insurance companies earlier this year.

"My big concern," said a source at a major underwriter, "is that we'll be seeing more defaults. We've gotten close to some major defaults already this year. Bond insurance is becoming worthless and when an issuer falls on hard times, defaults happen."

Jefferson County, Ala., nearly defaulted on $3.2 billion in bonds for its sewer system earlier this year. The county is in the process of filing for bankruptcy and is embroiled in a lawsuit with Financial Guaranty Insurance Co. and Syncora Guarantee Inc.

Higher yields are silver lining

Municipal bonds have gotten riskier, however, and this may bring rewards to muni investors, noted the source.

"Munis are risky now and yields are also high, so that's good news for investors at least," he said.

"The muni market is never going away. There will always be issuers who need capital, there will always be investors who want to make a solid yield, tax free, and there will always be underwriters to sell them.

"The landscape has changed before and it will change again. That's irrelevant at the end of the day."

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