Fundamental Municipal Credit Quality Metrics Stabilize and Improve

Stockton, Jefferson County, and Detroit oh my!  These are the big headline defaults and bankruptcies that have hit the municipal market recently.  SNW Asset Management has avoided these names because we pay close attention to the financial results of our credits and the overall health of the municipal market.  As part of our continuous credit review processes we have analyzed many hundreds of municipality’s fiscal year 2012 financial results and adopted budgets for fiscal year 2014.  From the headlines you may think municipal, state and tax exempt issuers in general are in poor financial shape.  While we acknowledge that there are headwinds in the sector, our credit research shows stabilization and marginal improvement in the financial results for the issuers of our clients’ holdings.  For example, the San Francisco Public Utilities Commission Wastewater Enterprise has improved its coverage ratios and free cash position while smartly issuing debt in this low rate environment.  Except for a few notable exceptions including Illinois and New Jersey, state balance sheets for fiscal year 2013 (FY13 financial statements will be released in the coming weeks) should show continued improvement as revenues exceed fiscal year 2013 budget estimates.  California has experienced a surge in tax revenue and the market has taken notice as spreads on their debt have tightened to what we believe are rich levels.  We are negative on the California credit story because of inconsistent financial management through the years and now a burdensome statewide income tax, not to mention longer term questions about the state’s massive and underfunded pension plans.   As states’ repair their balance sheets local credit could also finally get some relief.  Oregon school districts as a whole saw their financial health deteriorate as state funding dried up, but certain credits have muddled through the downturn well by managing expenses and raising revenue when necessary.  On the east coast, credits such as Suffolk and Rockland Counties in New York mismanaged the downturn and their balance sheets are now so strained its even odds that they remain going concerns.  In all, the fundamental municipal credit quality of our client’s holding are stabilizing and beginning to show improvement after years of downsizing and service reduction.