Bridgeport bankruptcy causes consternation


NEW YORK -- While a military victory abroad prompted a parade on Wall Street yesterday, the aftermath of the financial failure at home of Bridgeport, Conn., caused consternation in the trading rooms upstairs, raising the prospect of other troubled cities having to pay more for money in the future.

Municipal borrowing in the credit markets is estimated by one Wall Street firm, Roosevelt & Cross, at $800 billion a year. The money funds bridges, schools, road construction and myriad other public facilities whose use extends beyond the current fiscal year. Raising the price for this funding, or shutting out troubled communities entirely, could have a profound impact on how governments operate.

Often in the past, the difference in interest rates paid by municipalities with excellent credit ratings and those with only marginal ratings could be measured in fractions of a percentage point. But recently, yields quoted on Maryland's pristine debt have been as much as 30 percent lower than yields on the debt of other East Coast jurisdictions, such as Philadelphia, New York and Massachusetts.

These differences could be magnified since Bridgeport's bankruptcy comes at a time when many other cities are suffering from a recession that has cut tax revenues and increased social service costs, thus further burdening already stretched budgets.

For months, Philadelphia has hovered on the brink of a financial morass. It carries a speculative-grade rating from the major credit analysis houses. Yonkers, N.Y., Detroit, St. Louis, New York, and even New Orleans, Chicago and Cleveland, while considered credible, are all in a position where investors may begin extracting larger premiums to compensate for new perceptions of risk.

"As you get lower ratings, you will start paying a far higher rate for money," said Peter D'Erchia, a senior vice president at Standard & Poor's Corp.

With Bridgeport's bankruptcy announcement Friday, trading effectively ceased in its approximately $200 million in outstanding debt. "People are just putting bonds out to bid to see what they are worth, and they are getting distress-level prices," said John Farawell, a trader at Roosevelt & Cross, a municipal bond firm.

Yesterday, Mr. Farawell said, yields on Bridgeport debt were quoted at about 10 percent, or about 50 percent higher than the 6.75 quoted on Maryland's bonds.

While analysts said Bridgeport's move had little direct impact on the prices of many other securities, Mr. Farawell said bonds issued by two other Connecticut cities, Waterbury and New Haven, were caught in the cross fire, with their yields climbing as much as a full percentage point, to 8.5 percent. Moreover, he said, the overall market was disturbed: "Any time there is any municipal problem, it is [broadly] upsetting."

Still, in recent decades the municipal market has had an outstanding record for solvency. Even now, despite a slew of ratings downgrades during the past 18 months, Standard & Poor's continues to rate almost all municipalities as able to meet principal and interest payments on time.

"I'm not in a panic over municipalities or the municipal bond industry," Mr. D'Erchia said.

Whether Bridgeport is even able to declare bankruptcy remains widely in doubt. It faces objections from the state, and many doubt other jurisdictions will attempt it. "Is it the first of many? Most people, including myself, feel it is not," said George Friedlander, head of the municipal department at Smith Barney. "It has too many problems and uncertainties associated with it."

Bankruptcy is often used by companies to reduce debt, but the problems faced by many municipalities, said Clair Cohen, head of the municipal rating department at Fitch Financial Services, isn't high debt but rather high operating costs.

Bridgeport has raised the prospect of using bankruptcy to renegotiate labor contracts but, said Ms. Cohen, the filing will not eliminate the unions and thus not lower labor costs. While that may be reassuring to investors, they may not be entirely sanguine. Andrew Windmueller, a vice president and portfolio manager with the Boston Co., considers Bridgeport only an isolated example of "how bad things can get."

Nonetheless, he said, "it should also be noted the forces that led to a degree of deterioration in Bridgeport are clearly forces that occur nationwide are impacting financial conditions in municipalities across the country."

His conclusion? Until the distinction in rates offered on lesser-quality bonds increases further, he believes it's wise to invest in only the most credible ones. Were these sentiments to be broadly shared, higher rates for the borrowings of the most financially strapped states -- as well as the reverse, lower interest costs for the prudent -- are inevitable.

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