MuniLand: Ring of Fire Exposure

Unpredictable natural disasters such as earthquakes, tsunamis and volcanoes are an ever-present danger in the Ring of Fire Region of the U.S. (Alaska, California, Hawaii, Oregon and Washington), and have caused billions of dollars of damage over the last century. Nonetheless, most municipal credits have been able to maintain strong credit quality after a disaster because of the strength, size and diversity of their revenue base; the financial flexibility provided by maintaining adequate reserves; good management; the presence of insurance and the backing of federal disaster support and reimbursements. 

Not all credits or sectors for the municipal market are created equal, however, and a combination of the type of disaster, its location and magnitude and the lack of a financial cushion could increase the vulnerability of weaker credits to natural disasters in the Ring of Fire Region. To mitigate exposure to Ring of Fire risks, we assign zones and review issuers to make sure they have appropriate levels of reserves and policies in place to minimize adverse natural disaster events. The combination of a large magnitude disaster and weak credit characteristics could lead to prolonged recovery and rebuilding, which could in turn lead to downgrades or insolvency. 

Comparatively, California leads West Coast states in earthquake preparedness. For example, California has laws requiring hospitals to retrofit buildings to meet structural performance and non-structural system standards as well as standards regrading communication and backup power supplies. We can measure how much investment hospitals or power plants are making in critical infrastructure by looking at their balance sheet for asset condition and plant age. Low asset condition or high plant age may indicate a lack of capital spending to meet seismic standards or general reinvestment.  

While seismic standards for hospitals in California are clear, nuclear power plants in the region present unique risks. Currently, national policy does not exist for how to dispose of nuclear waste. Across the nation, the current policy is to store waste on site. The lack of Federal policy for nuclear waste disposal is an acute issue in the Ring of Fire because of seismic and tsunami risk. In the meantime, secular trends in the power sectors are undermining nuclear energy generators, leading to plant decommissioning.  Overall, we are underweight nuclear power generation in the Ring of Fire due to secular weakness and natural disaster risks.