Seix Muni Perspectives - Recent Hurricanes' Impact on the Muni Market (September 2017)
Written by Ronald Schwartz, CFA and Phillip Hooks, CFA
Over the last month, we have seen three Category 4 hurricanes make landfall in the United States: Hurricane Harvey on the Texas Gulf coast, Hurricane Irma on the Florida Keys and Florida peninsula and Hurricane Maria on Puerto Rico and the US Virgin Islands. This is an unprecedented occurrence and is expected to have far-reaching ramifications to the affected areas, national economy and insurance sector. Thus far however, effects in the municipal market have been relatively minor, though we could see future impacts on a local and national scale.
The largest muni market concern during a natural disaster is often for the directly affected areas that may experience extreme economic disruption directly through property damage and indirectly through the associated recovery period of depressed economic activity. Despite the strength of the three storms, we are optimistic that the economies in the Houston area and Florida should rebound well, albeit after a period of disruption. Credits in these areas secured by a broad pledge (Local GO, Water/Sewer, Transportation, State Sales Tax) should fare relatively well as the broad nature of the pledge/assets available will help to bridge the gap during any period of disruption; those secured by a more limited pledge of revenues (Bonds secured by hotel taxes, small sales tax districts, school districts) may be more susceptible to large negative affects if associated assets/taxes are affected for a prolonged period of time. Puerto Rico and the Virgin Islands could both experience large scale credit disruption across all associated credits, as they experienced widespread devastation and were in a precarious financial position prior to the current situation.
A secondary effect of natural disasters is the potential to create supply/demand imbalances caused by insurance losses and the forced liquidation of municipal bond portfolios. As insurers face large losses they are often forced to liquidate some of their municipal bond holdings in order to maintain their stated claims paying abilities and ensure that adequate cash positions are maintained. Loss estimates from the three Hurricanes are staggering: Hurricane Harvey is estimated at $180 billion, Hurricane Irma at $70 billion and Hurricane Maria at $30 billion. At this time, P&C insurer losses are not expected to create forced selling as many losses will be absorbed by federal (FEMA, flood claims) and state (Florida Hurricane CAT funds) sources leaving insurer’s in a more favorable position than loss estimates would indicate. To date, we have not seen an underperformance in the market from forced sales and do not expect that this will occur in conjunction with these storms.
Overall, despite the large humanitarian effects and devastation of property, these storms are not expected to have a major impact on the municipal market. Long term, as federal money flows to the affected areas, it could spur new growth and outsized economic productivity. Though the recovery may take several years, history has shown that rebuilt areas, such as New Orleans, often surpass their pre-natural disaster levels of economic growth emerging with stronger and more diverse economies. Situations such as this point to the value of active management with solid fundamental credit research to differentiate between spread widening caused by a fundamental credit change and that which presents an opportunity to acquire stable credits at advantageous spreads.
The assertions in this perspective are Seix Investment Advisors’ opinion.
Investment Risks: All investments involve risk. Debt securities (bonds) offer a relatively stable level of income, although bond prices will fluctuate providing the potential for principal gain or loss. Intermediate-term, higher-quality bonds generally offer less risk than longer-term bonds and a lower rate of return. Generally, a portfolio’s fixed income securities will decrease in value if interest rates rise and vice versa. A portfolio’s income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax. There is no guarantee a specific investment strategy will be successful.
This information and general market-related projections are based on information available at the time, are subject to change without notice, are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for individual investing purposes. Information provided is general and educational in nature, provided as general guidance on the subject covered, and is not intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. This information may coincide or conflict with activities of the portfolio managers. It is not intended to be, and should not be construed as investment, legal, estate planning, or tax advice. Seix Investment Advisors does not provide legal, estate planning or tax advice. Investors are advised to consult with their investment processional about their specific financial needs and goals before making any investment decisions.
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