Will The Federal Government Shut Down Impact Your Muni Holdings?

The good news for our clients is that the Federal government shutdownshould have no near-term impact on their muni holdings.  The municipal credits across our complex have reasonable and liquid cash reserves and well-managed operations that can hold up to the near-term disruption.  Any potential impact from the Federal budget battle and debt ceiling debate is far more likely to impact public finance issuers that rely heavily on Federal transfer payments such as Medicaid and Medicare matching funds or direct payments for debt service on bonds such as GARVEEs, which are highway infrastructure bonds.  While these types of debt are not a part of the vast majority of SNWAM holdings, our clients do have some exposure to the healthcare sector and GARVEES; however, we have selected issuers in each space that have ample insulation from these federal funding risks.  Certain healthcare institutions can be very reliant on federal revenues via Medicaid and Medicare.  A delay of Medicaid and Medicare reimbursements would be a credit negative for these healthcare operators, as an increase in their days account receivables could result in delays in vendor payments, employee salaries or even interest payments.  We pay very close attention to this metric, as well as the percent of total revenue from Medicaid and Medicare, when making investment decisions.  As far as GARVEES are concerned, we limit our credits in this space to covenant structures that ensure timely interest payments in the event of disruption by analyzing coverage ratios and free cash positions and by selecting structures that pledge additional specific revenues from the issuing states beyond the federal dollars.   Thus, our muni credits are well protected from disruption due to the Federal government shutdown.