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Distressed Debt Securities Newsletter November Issue

There have been a number of developments in the slow motion train wreck of Florida Community Development Districts (CDD) that provide some insights into how and when this debacle may end. To bring everyone up to date, since December 2007 some 154 districts have defaulted on $4.7 billion in municipal bonds, either through payment defaults or through making interest payments or debt retirements by invading reserve accounts. We also continue to show 62 districts representing $1.3 billion of bonds as on our watch list for districts likely to default. To put these numbers into perspective, below is a tabulation of how this train wreck is progressing.

9/30/2010 9/30/2009 # % $(Million) # % $(Million) Performing Issues 145 42 1,729 195 55 3,197 Defaulted Issues 146 42 4,453 105 30 3,205 Watch Issues 62 16 1,352 53 15 1,132 Total 353 7,534 353 7,534

The decrease in performing issues appears dramatic, but reflects in part poor reporting practices more than changes in status. As most municipal market participants are aware, issuers are not very forthcoming with bad news and the SEC has almost no jurisdiction to compel greater transparency. The increase in defaulted issuers to 146 does not reveal that 8 issuers in the Watch category did default on payments but have since cured the default. Also, the performing bond issues are significantly smaller than the more recent defauted issues as evidenced by the fact that defaults total 42% of the districts, but 59% of the dollar amount.

In an effort to get a measure of how serious a problem the state of Florida faces, we launched a survey of the 218 projects out of the 353 total that are still in an ongoing development mode. The data was tabulated for December 2009 and June 2010 in order to create a measure of aggregate absorption rate and forecast of build-out time. Based on reported numbers, which are subject to less than rigorous or uniform reporting standards, we have been able to construct the attached profile of how well the housing build-out is progressing. The aggregate numbers show an annual absorption rate of 1.8% which would indicate a 47 year build-out time period. This may be overstating the problem because we are aggregating active with inactive projects. We found that 84 districts representing 49% of the planned single family houses and 40% of the multi-family units had reported zero sales since inception. These projects represent $2.4 billion of bonds that are at a high risk of total failure.

We will feature the status of the individual projects making up the aggregate statistics on our website and expect to provide continuous updates over time.


% # of Projects 218 Bonds ($000) 5,861,102 Total acreage 193,939 Planned Single Family Homes 194,609 100.0 Sold – thru June 2010 26,509 13.6 Sold – thru Dec. 2009 24,708 12.7 Planned Multi-Family Units 50,048 100.0 Sold – thru June 2010 5,345 10.7 Sold – thru Dec. 2009 5,345 10.7 Planned Commercial Sq. Ft. (000)34,068 100.0 Sold – thru June 2010 4,946 14.5 Sold – thru Dec. 2009 4,915 14.4