Environmental factors can affect credit quality

Cumberland Advisors is located in the city of Sarasota. In preparation for Hurricane Ian, which was initially expected to make landfall in the Tampa area, we dispatched employees to our disaster recovery site in Vineland, NJ, where Cumberland’s corporate headquarters was originally located.

Our remote operations have been robust since our shift to fully remote working with the start of the COVID shutdowns. Fortunately, all of our staff are cared for and safe. Our thoughts and prayers are with those affected by Ian’s shock and who lost property and possibly their lives.

The massive, deadly surge of water and catastrophic winds that first hit land just west of Fort Myers are poised to make Ian one of the costliest storms in the history of the United States.

• Damage – $67 billion was a first estimate. Katrina was worth over $100 billion.

• People without power – at the highest, over 2.5 million, and most recently 1.9 million (Florida’s population is 21 million).

• Number of dead – unknown; could be in the hundreds based on 911 calls asking for help.

CNN reported that the Coast Guard and National Guard were “removing people from the rooftops of Fort Myers” with planes. Officials have also been particularly focused on sending search teams to Lee County, fearing many still need rescuing. Today we see reports of intensified rescue efforts and a growing death toll.

President Biden has approved Florida Governor DeSantis’ request for a major disaster declaration. The initial declaration authorized FEMA to provide individual assistance to survivors in nine counties: Charlotte, Collier, DeSoto, Hardee, Hillsborough, Lee, Manatee, Pinellas and Sarasota. People who live in these counties can apply for federal assistance at Disasterassistance.gov or by calling 800-621-FEMA (3362). FEMA will also provide 100% federal funding for debris removal and life-saving emergency measures for 30 days in these counties.

The federal government coordinated and pre-positioned supplies and more than 1,300 responders before Ian landed to ensure resources could get to where they need to be as quickly as possible. Federal responders work alongside nearly 5,000 members of the Florida National Guard and other state emergency and response managers.

Thirty thousand utility workers from out of state have come to the area to help with recovery efforts.

The State of Florida issues daily releases with similar information and more at flgov.com/2022/09/30/florida-response-to-hurricane-ian-continues.

With respect to municipal credit quality, while there is devastating damage to homes, utilities, businesses and lives, reconstruction efforts, with federal, insurance, personal and businesses, will stimulate economic activity and municipal revenues. Thus, the immediate to medium effect on the credit quality of bonds issued by affected municipalities may be mitigated or even beneficial for larger and more diverse municipalities. Smaller communities or those with less diversified financial resources may see credit weaknesses.

Hurricanes, with their strong winds and waters, reveal the vulnerability of our communities. The trend of rising sea levels and longer, stronger storms causing more devastating flooding is certainly on the minds of municipalities and residents as they consider rebuilding, strengthening and preparing for the future – or to leave an area due to increasing risks.

Environmental factors can affect credit quality. Rising sea levels and stronger storms can pose a longer-term risk to credit quality if areas are not reinforced or potential residents are scared.

Insurance companies also consider the size and extent of natural disasters and the damage they cause when pricing policies or even considering providing coverage to certain properties and communities. Already, Florida has a state-funded reinsurance program that attracts insurers that otherwise wouldn’t provide coverage in the state. The Florida Hurricane Catastrophe Fund as well as the Citizens Property and Insurance Corporation, which provides residual insurance to homeowners otherwise able to obtain insurance, will be the subject of future commentary.

At Cumberland, we own Southwest Florida bonds, most of which have AA ratings or are insured or pre-paid. Many municipalities have amassed healthy reserves, have insurance, and will receive funds from FEMA. Many municipal revenue bonds, such as water and sewer bonds, are structured to have a debt service reserve equal to one full year of debt service. We will evaluate developments and make buy and sell decisions based on our analysis.

Patricia Healy, CFA, is senior vice president of research and portfolio manager at Cumberland Advisors. She is part of a team that performs portfolio construction, analysis, trading and research for tax-exempt and taxable bond accounts. She has extensive experience in fixed income credit analysis, including at rating agencies, banks and investment management firms.Contact her at feedback@cumber.com or 941-926-6279.