Northeast Issuers Ride Out Storms, But Credit Concerns Persist: Moody's

U.S. public finance issuers, especially in the Northeast, have survived the initial effects of Hurricane Irene and Tropical Storm Lee, Moody’s Investors Service reported, though many local governments may face further challenges as they sift through the damage.

“Credit impacts could still emerge over the coming months. It is too early to tell how much of the costs related to the storms were unbudgeted, and how much will be reimbursed by the federal government,” analysts wrote.

Moody’s surveyed hundreds of public finance issuers in the areas most affected by the slow-moving storms, which struck a wide swath of the Northeast in late August.

Especially hard-hit were New York, rated Aa2, New Jersey, rated Aa3, North Carolina, rated Aaa, and Vermont, rated Aaa, all with stable outlooks. Flooding caused the greatest damage to roads, bridges and buildings in those four states.

Wind damage to utility lines and other infrastructure was notable, but less severe than forecast.

The damage in states such as Massachusetts, rated Aa1, Delaware, rated Aaa, and Connecticut, rated Aa2, all of which have stable outlooks, appears to have been more muted, the rating agency said.

Many issuers, according to Moody’s, were well-prepared by early warnings about the slow-moving storms. The agency cited evacuations in New York and New Jersey before the hurricane struck.

Geordie Thompson, a vice president and senior credit officer at Moody’s, said the agency has not found examples of disruptions that affect the ability to make debt-service payments in the short term.

But, he added, some problems, though not visible immediately, may emerge in the medium to long term. “Middle-term concerns pertain to how this affects budgets, and what kinds of reimbursements will come from the state and federal governments,” Thompson said.

“We’ve found that long-term impacts of natural disasters sometimes have positive credit results,” he said. “For example, sales tax revenue may rise as people and businesses rebuild. This has happened in Florida after bad hurricane seasons, in Mississippi after Hurricane Katrina, and in California after wildfires. There could be negative long-term developments, however, if large numbers of people decide to move away from places within flood zones.”

According to Moody’s, New York and Vermont reported close to $1 billion in damage, while North Carolina estimated more than $400 million. Virginia, rated Aaa with a stable outlook, has a preliminary estimate at $39 million, and New Hampshire, rated Aa1 also with a stable outlook, estimated its cost at $25 million.

Some states have yet to tally the costs.

The flow of funds to pay for cleanup varies by state, Moody’s said. Due to the damage in Vermont, that state expects FEMA's reimbursement rate to be closer to 90%, leaving only 10% for the state and local portion. The state, meanwhile, has avanced local aid packages and established a plan enabling local banks to borrow from the Municipal Bond Bank if necessary.

In North Carolina, by contrast, the local government will generally pay out the funds for the actual cleanup, and then expect reimbursement from FEMA.  Moody’s said the state will provide funds to satisfy the matching requirement necessary for federal assistance.

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