The devastation from Michael in terms of lives and property damage is still being assessed. Our hearts go out to those affected.
We have written (http://www.cumber.com/wildfires-abound/) about the general uptick in economic activity in a municipality after a storm or other natural disaster and the resulting maintenance of credit ratings. However, there could be a period of weakness that might or might not affect credit quality, trading levels, and ratings of affected municipalities, depending on how widespread the disaster is and the financial resiliency of the affected municipality. This resiliency depends on the availability of Federal Emergency Management Agency (FEMA) funding after a state of emergency has been declared and on insurance claims and sales tax growth from the inflow of workers and goods for rebuilding efforts. Disaster preparedness plans have improved in many jurisdictions, too. New Orleans did experience downgrades after Katrina but has since surpassed its pre-Katrina rating. The downgrades were also reflective of a city that did not have its financial house in order when the hurricane hit.
Cumberland evaluates a storm’s trajectory as early as possible, determines the municipalities that may lie in the storm’s path and compares them with bonds in our clients’ portfolios. We then sell bonds of what we see as potentially vulnerable municipalities. Although the uptick in economic activity is expected to stabilize or improve a municipality’s credit quality after rebuilding, there could be continued “headline risk” generated by media coverage of the storm damage, or financial vulnerabilities made visible in times of stress. When Michael started picking up speed and it appeared that the storm might be worse than originally thought, we embarked on the evaluation exercise and sold positions in the Panhandle that we estimated were in the storm’s path. We were able to find replacement bonds at comparable levels.
Cumberland invests mostly in AA-quality bonds that have strong, diverse and growing economic bases and good financial management, as demonstrated by large reserves and reasonable debt levels. These municipalities are less vulnerable to credit disruptions generally. We regularly review holdings, which change as new clients transfer in portfolios. We sell holdings that do not align with our credit and structuring objectives; however, we evaluate the market for an optimal time to exit positions.
Patricia Healy, CFA
Senior Vice President of Research and Portfolio Manager
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