Public finance credits should continue to handle the costs of the Hurricane Sandy recovery with minimal impact on their credit ratings says Moody's Investors Service in a report.
New risks are evolving as the recovery moves into a new stage, however. They now involve the timing of Federal Emergency Management Agency (FEMA) aid, access to capital markets for borrowing, and reductions in property tax collections and tax-base valuations.
"We believe the sector as a whole will manage well through the storm's short- and long-term effects," says Geordie Thompson, a Moody's vice president and senior credit officer. "Other than those we have already taken, we anticipate few ratings to change as a result of the storm."
To date Moody's has only downgraded one public finance issuer -- the Borough of Seaside Heights, NJ (A3) -- because of the effects of the storm. Moody's has assigned negative outlooks to four New Jersey shore municipalities and placed five New York and New Jersey credits on review for downgrade for which the rating agency believes the storm's aftermath poses acute risks.
Most rebuilding costs will be reimbursed by private insurance, federal aid, charitable donations, state and local resources, and personal savings, and Moody's expects most of the damaged areas to rebuild. Delays in FEMA reimbursement for cleanup and overtime costs, as well as revalued property tax bases, could pressure some entities in the medium-term.
Many public finance issuers have temporarily used their own cash or incurred debt in the past month, intending to replenish the cash or pay down the debt when FEMA reimbursements arrive. Moody's continues to assume that such reimbursements will be forthcoming, given that some payments have begun to arrive.
Any departure from the assumed 75% reimbursement rate, or reimbursement delays lasting substantially longer than one year, could place unanticipated rating pressure on many issuers.
"Many of the fundamental strengths of state and local government sector, such as the dependability and consistency of taxation as a revenue source even in the face substantial damage to the tax base, and the rarity of borrowing to fund operations, will contribute to the sector's rating stability even as the effects of the hurricane strains cash balances, increase debt burdens, and lowers tax base values," says Julie Beglin, a Moody's vice president and senior analyst.
Hurricane Sandy caused enormous damage to hundreds of local governments, utilities, universities, and other types of public finance debt issuers, primarily along the New Jersey Shore and the South Shore of Long Island.
