Municipal Impact from Hurricane Harvey

Hurricane Harvey, which hit the coast of Texas last week, has been one of the most devastating storms in U.S. history. It appears that it may have a similar impact as Superstorm Sandy (2012), Hurricane Katrina (2005) and Hurricane Andrew (1992). 

Wind and flooding from hurricanes have the potential to cause billions of dollars of damage, but most municipal credits are able to maintain strong credit quality after a storm has passed. We are more concerned about Harvey’s long-term impact to the tax or revenue base of municipalities than about the costs associated with providing emergency services during or immediately after the storm, as most of the cost of providing those services will be reimbursed by the federal or state government. Population shifts or the choice not to rebuild damaged or destroyed properties are of concern as they could impact the amount of revenue available to pay debt service for outstanding bonds. For the most part, the long-term credit quality of municipal debt has remained relatively stable after storms, and in some cases tax revenues have increased due to new construction or increased purchases of taxable items such as construction supplies or new motor vehicles.

While many municipalities have been able to weather devastating storms, not all credits are created equal, and a combination of storm location and intensity and a lack of financial cushion have revealed some weaker credits’ vulnerability to natural disasters, including hurricanes. The combination of an intense storm and weak credit characteristics can lead to prolonged recovery and rebuilding, which can also lead to downgrades or defaults. New York City and New Orleans provide a comparison of varying credit impacts from hurricanes. Both cities suffered severe damage, New York from Hurricane Sandy in 2012, and New Orleans from Hurricane Katrina in 2005, but the credit impact was less severe on NYC. New Orleans was already a relatively weak, BBB rated credit before Katrina hit, and it was downgraded to non-investment grade after the storm. Nearly twelve years later, which includes one of the longest periods of national economic growth, the population of the city is still below its pre-Katrina population.

In addition to reviewing the credit quality and assessing the ability of a municipality to face emergencies, we also work to mitigate disaster impacts on portfolios by evaluating the geographic diversification of holdings. We want to ensure, for example, that our holdings of Texas bonds are not concentrated in hurricane zones along the Gulf of Mexico. Our exposure to Harvey impacted credits is minimal, and the credits we do own are either AA or AAA rated, or insured by the Texas Permanent School Fund, which backs school district debt issued in Texas. 

Also, we hold no enterprise revenue debt of airports, hospitals or public power issuers in the region.

We will continue to monitor the impacts from Harvey, including its effects on credit and pricing of Texas bonds, while keeping an eye out for opportunities to add value by purchasing bonds that experience unwarranted credit spread widening. 

Source:  Moody’s, Standard & Poor’s