Fitch Ratings is closely monitoring the impact of damage related to Hurricane Sandy along the East Coast and its effects on ratings of general governments, utilities, educational and healthcare facilities, and transportation systems.

Coastal areas in New York and New Jersey were affected most heavily by the storm, although some locations more inland and in other East Coast states were also hit.

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.

In the wake of Hurricane Sandy there have been unprecedented levels of damage to power, subways, commuter rail and telecommunications. Airports and roads also experienced water damage and service disruptions but are returning to normal more quickly. Over the last two days Fitch has been in contact with impacted airports, roads and ports and on Tuesday, Nov. 6 will issue a detailed report covering operational status, liquidity and other important credit issues related to impacted facilities.

Fitch has observed 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. Ratings have rarely been adjusted based solely on the impact of disaster-related damage. Property is often rebuilt or replaced, largely with funds that are reimbursed by other levels of government and private insurance. The replacement property may be of higher value than the original. However, every event and every community is different, and Fitch is identifying those issuers that appear most at risk.

In the near term, Fitch will be most concerned about the magnitude of damage in a particular locality and the extent to which management was prepared for a major storm event. Fitch takes this level of preparedness into account in its ratings but if damage is more acute than envisioned, Fitch will assess the risk that sufficient funds may not be available for non-discretionary costs including debt service. If Fitch perceives heightened risk, a given rating will be re-evaluated. A number of the smaller communities hit especially hard in this storm do not carry their own ratings but are part of a larger government such as a county that has greater resources and a much larger economic base over which to spread any required costs.

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 believes the risks of these two types of security are similar.

In the longer term, Fitch will become concerned if damage appears to be of a magnitude that fundamentally changes an issuer's economic prospects. 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. This could reduce the community's tax base or impair its growth potential.

Fitch believes downgrades of revenue bonds due to Hurricane Sandy-related damage are unlikely largely for the reasons stated above. However, particular risks to entities whose ongoing operations are critical to pledged revenue generation may make their bonds more susceptible to downgrade. Similar to issuers discussed above, Fitch's analysis will include the magnitude of damage and the entity's preparedness for such an event. Those with severe damage and weaker cash flows prior to the storm will be of greatest concern.

Municipal utility issuers in the affected area are likely to experience operational disruption but generally maintain sufficient resources and liquidity to buffer the financial and rating impact until more permanent funding arrangements are secured. Additionally, the authority and capacity to increase rates as necessary to maintain adequate cash flow is viewed as a fundamental credit strength for these issuers. Fitch believes that one exception may be the Long Island Power Authority (LIPA), which is faced with system repairs and related costs that are unprecedented. Political criticism and pressure are ever-present for LIPA and therefore discounted by Fitch. However, any failure to fully recover storm-related costs, or meaningful delays in the recovery, as a result of politically motivated actions could result in higher financial risk and downward rating pressure for the utility.

For the hospitals in the affected areas, Fitch believes there could be near-term financial pressure due to increased expenses related to damage and preparedness in addition to loss revenue from closed facilities or inability of patients or physicians to access to facility. The extent and length of the impact will need to be assessed on a credit by credit basis. For continuing care retirement communities, Fitch will monitor the potential long-term impact from the storm on future sales in an already weak housing environment.

For higher education institutions that have experienced some facility damage, Fitch believes most have the ability to manage the increased costs associated with repairs. If there are institutions that remain closed for an extended period of time due to more extensive damage, Fitch will monitor on a case by case basis to determine whether there will be longer-term negative repercussions, including potential impact on future student demand.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.