Bond insurers guarantee $13.6 billion in bonds in areas devastated by Hurricane Harvey, and analysts are still adding up their exposure in Irma’s wake.
While the exact extent of this season's hurricanes' cost to insurers is unknown, early indications from S&P Global Ratings are that exposure for Assured Guaranty, Build America Mutual and National Public Finance Guarantee doesn't pose a risk to their ratings.
Assured Guaranty hadn't received any hurricane related claims as of Sept. 13 as a result of Hurricanes Harvey or Irma, according to Robert Tucker, senior managing director of communications and investor relations.
“If we do receive claims, we expect those payments will be reimbursed, consistent with what we experienced after Hurricane Katrina,” he said. “Issuer debt service liquidity needs sometimes arise in storm-related circumstances because, while the issuer has the resources to pay, funds may not be available to make debt service payments in a timely manner.”
“As always, if we do receive any claims, investors owning bonds insured by Assured Guaranty will receive full payment of scheduled principal and interest, in accordance with the terms of our insurance policies,” Tucker said.
In a report on Harvey on Sept. 5, S&P that said insurers may be called on to make scheduled debt-service payments not because of issuers' inability to pay, but because of electronic transfer problems.
“In the absence of electricity, phone service, and other basic business infrastructure, funds may not be transferred to investors in a timely manner. Issuers will likely reimburse bond insurers for these payments,” said the report.
The report also said that the insurers’ exposure to Harvey is easily manageable and that S&P believes it will result in liquidity claims rather than loss claims. Any moderate issuer rating changes aren't likely to threaten any of the firm's ratings on bond insurers, S&P said.
National is no longer writing new business since it got a two-notch downgrade to A from S&P a few months ago, though it is responsible for any bonds outstanding that it insures. S&P rates both Assured and BAM at AA.
Kroll Bond Rating Agency put out a report after the market closed on Sept. 14, saying that although the exposures of the bond insurers in these areas are substantial, there are significant mitigating factors to severe financial distress among insured debt issuers in Texas and Florida. However, the issues are different in Puerto Rico, which is already in default, and the Virgin Islands, which was more seriously impacted by Hurricane Irma and in financial distress well before the storm.
"Overall, KBRA sees no rating impact on the bond insurers it rates from the effects of Harvey and Irma," said the report. "KBRA will continue to monitor the credit implications of these storms. Notwithstanding the history that the relevant credit effects of natural disasters tend to be short lived, it remains to be seen how deep and long lasting the impact will be given the scope and severity of these events. Our sincere thoughts are with those affected by these disasters."
Kroll rates National at AA-plus and three operating units of Assured Guaranty (Assured Guaranty Municipal Corp., at AA-plus, Assured Guaranty Corp., at AA and Municipal Assurance Corp., –at AA-plus), all with stable outlooks.
S&P measured the next two months of debt-service payments for all issuers in FEMA-designated counties against an insurer's liquidity resources. Each insurer has sufficient liquidity resources to meet these potential near-term claim payments.
Laura Levenstein, chief risk officer of BAM - the second biggest active bond insurer after Assured - said that details of every storm are unique and that hurricanes the kinds of events the company anticipates when underwriting credits in Florida and Texas. The portfolio is designed to be resilient, she said.
“Overall, we agree with the S&P that the risks from hurricane are more about liquidity claims than long-term defaults and losses. As an example, we might make a payment simply because the storm logistically prevents an issuer from providing the funds to the bondholders on a timely basis, but we’d then get reimbursed quickly,” she said.
“Even there, the timing of Harvey seems to have limited that risk: Because it struck just a few days before a major bond-payment date, most of the issuers in the affected areas had already made their payments to the bonds’ trustees. We had $96 million of insured debt service due from issuers in the FEMA-recognized disaster areas on Sept. 1, and we did not receive a single claim.”
David Veno, director and primary credit analyst for financial guarantors at S&P, said the rating firm was still evaluating the impact of the storm on Florida and other southeastern states.
“We have nothing on Irma yet," Veno said. "We are working on the final numbers but the concept is still the same. The bond insurers probably will make some payments on some debts because of the interruption of business, where the money can’t physically get from the issuer to the trustee.”
Veno said Irma will be similar to Harvey and even Katrina, where the insurers should step in to make payments and get reimbursed later, because there was no true default.
“I do think that Irma will result in more payments for the insurers because it affected a larger area. All three insurers have good liquidity and keep enough cash on hand to step up in these unforeseen circumstances,” he said.
Veno said for any debt service payments due on Sept. 15, the money was like to have been with the trustee before Irma ever hit. He added it’s possible for complications to arise for any payments due on either Oct. 1 or Oct. 15.
S&P found $13.6 billion in insured public finance bonds in the disaster zone from Hurricane Harvey ranging from general obligations and other tax-supported bonds to sector-specific types such as health care and transportation.
“General obligation bonds are typically more highly regarded because a larger and more diverse resource base backs these bonds," the report said. "At the other extreme, bonds backed by revenues of a specific enterprise -- such as airports and ports, hospitals, or convention centers -- might be more susceptible to impairment because they are backed by more narrow revenue streams.”
The report went on to say that in each case, the potential for default can only be determined once the issuer can assess its specific circumstances, including storm and flood damage, economic base impairment, and available reserves.