The onset of hurricane season on June 1 and the season's first named storm (Andrea) making landfall in Florida remind us that natural disasters can affect bond investors and issuers, including municipal entities in geographic areas in the path of a weather-related event.
Disasters can saddle municipalities with unplanned expenditures for rebuilding and relief efforts, curtail revenue streams from damaged facilities, dampen local economic activity and, in extreme cases, delay tax collections.
Soon after a tornado killed 24 people in Moore, Okla., on May 20, a local school construction agency postponed a scheduled bond issue. The Cleveland County Educational Facilities Authority had planned to raise $68 million from a bond sale the week of May 27, but pulled the issue after the storm devastated Moore, which is located in this county.
Proceeds from the bond sale were to be used to construct two new elementary schools and a new junior high school, as well as make repairs and improvements to existing school facilities. On May 23 Moody's said it was evaluating possible cost and revenue impacts for various Oklahoma bond issuers including the Cleveland County school district and a regional hospital destroyed by the storm.
When such events occur, Interactive Data intensifies our scrutiny over market conditions, utilizing our ability to mine Municipal Securities Rulemaking Board trade data by issuer, state, county and city, plus market color that our evaluators obtain from participants.
In most instances, however, the municipal bond market shows little immediate trading or price reaction in the aftermath of a natural disaster. We did note three block trades of Cleveland County, Okla., Independent School District bonds took place May 21 at prices two points lower than the previous day's Interactive Data evaluated price.
Over the past decade, major storms that had a tangible impact on specific municipal bonds and issuers include Hurricane Sandy in the Northeastern U.S. in October 2012, the Joplin, Mo., tornado in May 2011; and Hurricane Katrina in New Orleans in August 2005.
The Joplin school district recently completed the second phase of a bond issue authorized by the city's voters in 2012 to rebuild schools destroyed by a tornado two years ago. That May 2011 storm killed 161 people - reportedly the largest death toll from a single tornado in the U.S. since 1953. The Joplin district sold $35 million of tax-exempt debt in July 2012 and sold an additional $27 million this past April 30.
While tornado risk affects the interior of the country, hurricanes are an issue for coastal areas - especially Florida, which sits within the Caribbean tropical-storm blender. Florida's state Legislature has created two distinct government entities that issue tax-exempt and taxable bonds to help reimburse insurance companies and to offer insurance to citizens who could not otherwise obtain it.
The Florida Hurricane Catastrophe Fund Finance Corp. sells reinsurance coverage to insurance companies. The Cat Fund was created in 1996 as a public benefits corporation, after Hurricane Andrew caused more than $25 billion in insured losses.
In its latest offering in April 2013, the catastrophe fund sold a total of $2 billion of three-year, five-year and seven-year taxable bonds.
The fund's name invites comparison with catastrophe bonds, which came into being in the 1990s as an alternative to reinsurance contracts. Usually sold by insurers, so-called "cat bonds" explicitly provide for principal cancellation if property damage, wind speeds or other variables exceed certain thresholds specified in a bond's offering documents.
However, Florida Hurricane Catastrophe Fund bonds have no such triggers. They are traditional municipal revenue bonds, repaid through taxes and assessments levied on insurers that do business in the state.
Bondholders are indirectly exposed to hurricane risk if payouts for damage claims overwhelm the corporation's ability to service debt and it is unable to raise additional revenue.
Another Florida state-run entity, Citizens Property Insurance Corp., was established in 2002 as a tax-exempt government corporation that provides residential and commercial property and casualty insurance coverage. Along with traditional municipal debt structures, Citizens utilized a catastrophe bond structure for some bonds it issued during 2012 and 2013.
A thousand miles to the north, as communities, businesses and individuals continue to confront the physical and financial after-effects of Hurricane Sandy, a bill introduced in the U.S. House of Representatives aims to enlarge the tax-exempt bond market's role in the reconstruction process.
HR 2137 would authorize a new category of exempt facility private-activity bonds called Hurricane Sandy Bonds, and would waive federal and state rules that currently limit how much of these bonds municipalities can sell.
The measure would allow the New York and New Jersey state governments and their political subdivisions to issue as much as $9.2 billion in each state, and Connecticut to issue up to $3.2 billion through 2015. Proceeds would have to be used for rebuilding transportation infrastructure and facilities, multifamily housing, commercial or public utility property.
Jon Barasch is director of municipal evaluations and
Jon Jacobs is senior fixed-income analyst for Interactive Data.
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