Cornerstone Research analyzed empirical evidence and academic literature to estimate the likelihood of default and bankruptcy by municipal issuers and entities for a tax controversy case.
On behalf of a U.S.-based company in a dispute with the Internal Revenue Service (IRS), Cornerstone Research staff analyzed empirical evidence on historical lifetime default rates of various types of municipal bonds. We also reviewed a wide variety of academic literature and studies by major rating agencies such as Moody’s, Standard and Poor’s, and Fitch Ratings.
Our work included analysis of:
- Traditional municipal sectors such as transportation, as well as public utility versus non-public utility entities in healthcare, multifamily housing, and industrial development sectors.
- Credit ratings of senior-lien and subordinated debt issued by municipal electric utilities in specific states.
- Observable yields and yield spreads of municipal bonds with different credit ratings
- The relationship between third-party bond insurance, credit ratings, and default probabilities of municipal bonds.
- Market data on single-named credit default swaps (CDS) and a tradeable index of municipal CDS (the Markit MCDX Index).