–But Reimbursement Prospects Important to Credit Assessment

By Yali N’Diaye

WASHINGTON (MNI) – While natural disasters have the potential to pressure
liquidity positions and weaken local governments credit strength in the short
term, the Big Three rating agencies indicated they expect little implication for
those issuers’ credit quality in the long term.

That being said, reimbursement prospects will have an important role in
assessing municipal issuers’ credit in the aftermath of hurricane Sandy.

“Initially we see strains on liquidity and short-term costs,” Standard &
Poor’s U.S. Public Finance analyst Karl Jacob told MNI Friday as the agency was
preparing to issue a report on the topic.

“But over the long term, ratings don’t tend to change because there is
usually a lot of federal and state assistance and insurance policies,” he added.

Fitch Ratings also noted in a commentary Friday that “in the immediate
aftermath of a number of past disasters, a consequent reduction in credit
strength of general government debt seemed inevitable.”

“However, any economic and financial impact of those events has proven
manageable in the short term and not detrimental to long-term credit quality,”
Fitch said, adding that “ratings have rarely been adjusted based solely on the
impact of disaster-related damage.”

Still, should the damages ultimately fundamentally alter economic prospects
of an issuer, the long-term credit assessment could change.

“The highest level of concern is likely to be in areas in which rebuilding
is prolonged, incomplete, or costly to the locality, or in which population
out-migration appears long-lasting,” Fitch warned.

But for now, Fitch estimates Sandy’s impact on public finance overall is
“uncertain but not likely severe.”

Moody’s on Thursday also highlighted that “U.S. municipal issuers have an
extremely strong track record of recovering from natural disasters without
impairments to bondholders.”

It added that while higher credit risk could stem from delayed financial
assistance from higher levels of government, Moody’s does not expect such lags
to “significantly affect long-term ratings” for issuers with enough liquidity.

In the short term, however, disasters such as hurricane Sandy do put
pressure on municipalities’ liquidity and credit ratings.

In that regard, “Over the coming weeks and months, as more information on
the level of damage and prospects for reimbursement and rebuilding become
available, Fitch will continue to monitor ratings in affected areas and make
adjustments if and when appropriate,” Fitch said.

Reimbursement prospects are indeed “very important,” Jacob told MNI,
“especially the federal reimbursements,” he said, referring to funds that
municipalities receive from the Federal Emergency Management Agency (FEMA).

“Many communities have levels of insurance and they have the availability
to tap credit,” Jacob said. “But historically the FEMA payments have captured a
significant portion of the cost.”

“But the timing in the reimbursement of the FEMA payments is always slower
than the bills that have to get paid,” he said. “So that’s why we are always
interested in liquidity and other options to tap lines of credit” or obtain
short-term loans.”

Moody’s also stressed the importance of payments from the federal
government and reimbursements from insurances, as delays would add strain on the
issuers’ finances.

And excess costs that are not matched by revenues can reduce fund balances.

“Fitch will assess the risk that sufficient funds may not be available for
non-discretionary costs including debt service,” the commentary said, adding
Fitch would re-evaluate ratings where it perceives “heightened risk.”

When assessing the credit risk by type of municipal issuers, some are more
vulnerable than others.

Moody’s noted that “Issuers of revenue bonds will be most immediately
affected by increased expenditures.”

“Classes of debt, including sales and special tax revenue bonds, and
revenue bonds supported by the operations of healthcare, educational, housing
and other enterprise entities may be more vulnerable owing to factors such as
appropriation risk and the cyclical nature of revenue streams,” Moody’s added.

“The vast majority of tax-supported debt in the affected region is backed
by property taxes, mainly through the issuer’s general obligation, with a
handful of bonds supported by broad-based sales and/or income taxes,” Fitch
noted. It added “the risks of these two types of security are similar.”

** MNI Washington Bureau: 202-371-2121 **

–email: yndiaye@mni-news.com

[TOPICS: MAUDS$,M$U$$$]