In competitive intelligence, you can use bond prices as an indicator for future financial difficulty and thus strategic intelligence. Bondholders are often privy to behind-the-scenes financial reports and price future risk into their trades.
Let’s have a look at the municipal debt for Ferguson, Missouri. It floated about $3 million in muni bonds that – prior to the protests and militarized response – were rated as prime debt. The “coupon” would be what you’d call an APR – here just 2%, which means it was thought to be secure. Since the bonds’ issue, Moody’s has downgraded these bonds to subprime (remember that term?) with a negative outlook. In fact, the bondholders trading out their holdings of Ferguson debt are unloading it for a 35% loss – meaning that they expect to lose *more* than that if they held the debt to maturity.
Why? Because they think that the city will default on these bonds possibly in the next year or two. Why? Well, it might be the tsunami of lawsuits about to slam into the city…and the DOJ settlement ain’t even dealt with.
There’s a legal and philosophical question about what will happen to the system in St. Louis, if not many other parts of America which have firewalled off poverty and dysfunction into different tax bases. Ferguson may be the bellwether for what happens legally around the country. After all, even when the “city” of “Ferguson” is completely insolvent, totally unable to pay salaries to its employees, unable to provide upkeep to its infrastructure, and unable to pay bondholders, much less settlements and judgments, it’s still going to exist in a real sense. It’s going to be a giant hole in St. Louis system, situated right next to places that are supposed to be completely different corporate entities, many of which are susceptible to the same liabilities once the precedents are set around the debtor’s prison thing going on in view of The Arch. When Ferguson goes broke but still owes money and still needs to pave roads and run schools, who pays the tab?
The state of Missouri?
The City of St. Louis? (Perish the thought.)
The people who made the policies that exposed the city to risk?
The employees who executed the policies?
I do not have an answer to that question, which is why it is so interesting. There is always Chapter 9 bankruptcy, but this is materially different than insolvency due to shifting demographics and economic forces. There were specific actions which led to the city going broke – so who’s liable?
Stay tuned.