Market Alerts

Assessing Hurricane Harvey’s impact on municipal issuers

Despite the widespread devastation from Hurricane Harvey, we believe that there should be little or no long-term credit deterioration for debt-issuing public entities in the affected areas.

Highlights

  • Rapid receipt of federal aid, in addition to private insurance and charitable aid from outside jurisdictions, will supplement municipal bond issuers' own-source operating revenues and reserves until economic recovery begins.
  • Existing resources and the desire to limit the downward spiral of a major economic hub will likely bring local action as well as state and federal aid that should help Houston and other large issuers to meet all obligations, including timely debt service payments.
  • In the remote chance that smaller issuers default, it will most likely be non-monetary with a complete recovery made over a short period of time.

No defaults expected

Due to the severe nature of Harvey and unique circumstances of local devastation, it is difficult to predict the length of recovery and, consequently, the amount and timing of additional federal aid or private insurance. Most likely, however, additional federal and state aid will continue to flow into these areas as needed. Houston and the Gulf area near New Orleans are extremely important to interstate commerce and global trade, especially U.S. oil and natural gas production, port activities and seafood industries.

Texas, like other states, maintains the exclusive right to collect a broad array of tax revenues from an economy much larger than the local areas hit hardest by the hurricane, and has the flexibility to raise taxes to assist recovery. The state is better positioned fiscally to deal with this event compared to Louisiana and New Jersey after Hurricanes Katrina and Sandy, respectively.

High credit quality

With prior storms of similar magnitude, short-term interruptions in economic activity and tax receipts were offset by critical infusions of federal disaster funds, which helped to reignite economic activity. Texas has a triple-A rating and a sizable rainy-day fund ($8 billion) that could be tapped if special legislation is passed. Local governments, particularly economically broad areas like Harris County and the City of Houston, also retain strong revenue-raising abilities with the vast majority of debt secured by safe and broad public tax sources. Most revenue bond issuers in the impacted areas are high-quality credits and benefit from strong balance sheets that can assist with the temporary disruption of operations. In addition, monies held by bond trustees, including debt service reserve funds, should be adequate to cover bond payments for up to a year.

Contingency plans in place

While defaults are not expected, it is conceivable that a small governmental unit could temporarily default if recovery is slower than expected. Municipal Utility Districts (MUDs) are among the most vulnerable as their bonds are typically supported by property tax assessments on a small number of homeowners.

Standalone projects with thin revenue streams that remain closed longer than anticipated also have an elevated risk of default. Even if defaults are avoided, local entities could face rating agency downgrades in the near-term due to constrained financial operations.

It should be noted that a good number of entities have issued debt secured by bond insurance. In addition, the Texas Permanent School Fund, a triple-A rated issuer with assets of $39 billion in market value, guarantees full and timely debt service payments on a large number of the school districts in the area.

Prior natural disasters have generally not resulted in major deterioration of long-term credit quality nor led to any significant payment defaults in the traditional municipal sectors. Harvey should be no exception. However, given the massive destruction, there may be instances where issuers will not be able to meet debt service payments in the immediate future, due primarily to communications failures, power outages, or personnel absences at government offices and local paying agents.

Still, we do not foresee widespread or prolonged debt service defaults as most issuers should be able to access bank lines, capital markets, or state funds to cover short-term obligations.