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Convention Cancelations May Put Muni-Bondholders at Risk

Hotels and Convention Centers Sit Empty

Hotels and convention centers that were bustling before the coronavirus pandemic have been vacant since March. Many of these properties across the country were financed by local governments with the help of municipal bonds.

In fact, about $9 billion worth of municipal bonds were sold to fund the construction of convention centers and hotels before the pandemic set in. With the future of the industry looking dismal, investors who purchased these muni bonds may now be at risk.

What Is a Muni Bond?

A municipal bond, commonly referred to as a muni bond, is basically a loan investors make to local governments. A state, municipality, or county issues these bonds and uses the money for projects like highways, schools, or convention centers. Interest investors receive from muni bonds is often tax-exempt, which makes them an attractive option—especially for people in high tax brackets.

However, these investments can be risky, as exemplified by what is happening in cities with lots of convention centers and hotels. Since March, at least six agencies that sold debt for the construction of these properties have had their credit ratings cut or had to dip into their savings to pay bondholders.

Looking Ahead

Overall, the $3.9 trillion municipal market has made it out of the pandemic relatively unscathed. However, for bondholders and cities that depend on money from tourism and conventions, recovery will be more difficult. Packing people from many different places into a confined space makes for a risky situation during a pandemic.

People will likely be reluctant to travel and gather in large groups for some time. Even if a vaccine is discovered and the pandemic subsides completely, companies may opt to connect virtually instead of sending people to conferences as much as they did pre-pandemic. Investors looking at muni bonds will be carefully analyzing cities that depend on tourism and conventions.

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