In this article, we examine how hurricanes impact municipal markets and also take a closer look at the financial strength of the municipalities affected by the recent storms.

Following twelve years without a major hurricane landfall in the United States, Hurricanes Harvey and Irma have left the Gulf Coast devastated. Both storms are expected to be among the most costly storms in U.S. history, with initial estimates for each storm exceeding $50 billion in damages.

Bond yields fell leading up to the landfall of both hurricanes; however, as Hurricane Irma weakened prior to landfall in southwest Florida and the storm path shifted westward away from Miami, yields rose again once markets reopened on Monday, September 11. The 10-Year Treasury rose 7.8 basis points from close on September 8 to end of the day on September 11, once it was clear Irma wasn’t going to pose the feared worst-case scenario.

The longer-term impacts on bond yields from hurricanes have been studied by analysts at Cumberland Advisors. Their analysis found that after six months, municipal yields tend to be little changed as a direct result of hurricanes. This is because the impacted areas recover just as New Orleans did following Hurricane Katrina and the Northeast did following Hurricane Sandy.

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Two of the states that took the brunt of the recent storms were Texas and Florida. Fortunately, both of these states have very strong financial positions. Texas is rated AAA by all three rating agencies, while Florida has a AAA rating from S&P and Fitch, but is rated one notch lower at Aa1 by Moody’s.

In terms of GDP by state, Texas ranked 2nd in the nation, while Florida ranked 4th in 2016. Both states have very strong economies, which, in addition to federal support, should help them recover quickly from the damage left by the storms. Texas also has the largest “rainy day fund,” with a balance of $9.7 billion.

While the credit quality at the state level is strong, smaller municipalities will be more likely to feel the financial impacts of the storms. Here are a few municipal areas that could be impacted:

• Texas Municipal Utility Districts (MUDs) – These are specially created districts outside of incorporated areas that provide utility services, such as water and sewer, to residents within the district. Given their smaller tax base, these districts may be more sensitive to lower assessed values of property damaged by the storms. Lower property values would decrease the amount of taxes generated from ad valorem taxes on the property, and these are the taxes that typically support MUDs.

  A prime example is Big Oaks Texas Municipal Utility District bond, bearing CUSIP number 089333LB2.

• Puerto Rico – The Governor of Puerto Rico warned the island could be without power and communication for days following Hurricane Maria’s landfall. This will create even more problems for the fragile Puerto Rican economy, which relies heavily on tourism. Puerto Rico is currently working through a U.S. Congress-approved bankruptcy process and has limited ability to borrow additional funds to rebuild following the storms. Damaged infrastructure from the hurricanes makes Puerto Rico bonds even more risky, and the recovery will be especially challenging due to the ongoing bankruptcy proceedings.

• Municipal Bond Insurers – Bond insurers may face additional claims as outlined by the S&P. These claims would likely be the result of extended power or communication outages causing electronic transfer problems for bond payments. So the claims are unlikely to rise because of fundamental reasons that could make the municipality unable to pay.

Keep our glossary of municipal bond terminologies handy to familiarize with different concepts commonly used by municipal investors.

For investors who may own bonds affected by the hurricanes, many municipal entities have provided voluntary disclosures on their status following the storms. The MSRB provides a database for disclosures that allows users to filter by state or CUSIP, making it easier to sort through recent filings of affected areas. The Big Oaks Texas MUD is one of the municipalities that provided an update indicating there was no significant damage to the system; however, there were approximately 921 homes within the district affected by flooding.

By using the information provided through the MSRB database, investors can make an informed decision on whether to hold or sell the bonds they own that could be negatively impacted as a result of the storms.

Be sure to check this article to remain aware of the due diligence process for evaluating municipal bonds.

Hurricanes create temporary hardships on the communities that are impacted by them. Although it takes time, the areas affected by these disasters tend to make a full recovery. Investors should stay informed through the MSRB on the status of bonds they own affected by the storms.

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