Concerns about public finances remain as North Carolina moves away from Helene

The devastation that Hurricane Helene rained down on the mountainous region of western North Carolina may be financially manageable for governments in the short term, but other municipal issuers could struggle, and the long term is murky, analysts say.

Helene hit the area Friday through Sundaybringing rainfall amounts of up to 31.3 inches, hurricane force winds of up to 106 miles per hour and several tornadoes. North Carolina’s death toll continues, and the storm could become the deadliest ever, eclipsing the 80 deaths from a 1916 flood.

The largest city in the region is Asheville, population 94,000, and its government says it could take several weeks to restore service to its entire water system.

NCDOT

Despite the tragic impact on lives, property and infrastructure, prominent local governments appear in good financial shape to face the recovery, and the state government will barely blink.

North Carolina has triple-A ratings overall. As of July 1, it had about $4.75 billion in its rainy day fund, about 15.9 percent of the enacted budget. In addition, it had about $2.25 billion in unreserved general fund balance, according to S&P Global Ratings. Moody’s Ratings says the state has $26 billion in available reserves.

“The financial impact is going to be one we’ve never seen before in the state of North Carolina, but I think we’re in good shape financially to weather this storm, no pun intended State Treasurer Dale Folwell told The Bond Buyer. The state has retired 66 percent of its debt over the past eight years and the state has money in its rainy day fund, he said.

“I wouldn’t trade seats with any other state treasurer because we’re dealing with the financial uncertainty of this subject,” Folwell said.

GO Asheville bonds are rated Aaa by Moody’s Ratings and AAA by S&P. Asheville Water Enterprise is rated Aa1 by Moody’s and AA-plus by S&P. As of June 30, 2023, the city had $207 million in debt and an available balance of $178.5 million.

Kroll Bond Rating Agency rates the Asheville Regional Airport Authority’s $372 million in debt at a core A-plus, and Moody’s assigns a core rating of Baa2. In April, KRBA said it had solid liquidity. The airport sold $175 million in bonds in April in a deal underwritten by Assured Guaranty.

Asheville Regional Airport remains open and accepting passenger and relief flights, said Doug Kilkommons, general manager at KBRA. The authority has very little debt service due through fiscal year 2026, which puts it in a good position to weather current disruptions.

Kilkommons said he expects passenger and flight volumes to drop for a few months, but then pick up again. Enplanement growth has been quite strong in recent years. The airport benefits from a strong management team.

The hardest hit county was Buncombe County, based in Asheville; County government is rated Aaa by Moody’s and the Buncombe County Metropolitan Sewer District is rated AA-plus by S&P. As of June 30, 2023, the county had $387.4 million in debt and $236.5 million in unrestricted net cash.

“I don’t have much information on how the storm has operationally affected either Asheville Water or Buncombe Metro Sewer, but it’s clear the damage is significant,” said Lauren Dahan, Moody’s vice president and senior analyst. “I do not expect any credit impact at this time, although we will continue to monitor all affected issuers.”

Both entities have very strong cash positions to fund repairs, while reimbursement from the Federal Emergency Management Agency, “which we would expect to cover a significant portion of storm-related capital projects,” takes time to arrive, a Dahan said. The Asheville Water Utility System had $66.3 million in debt and 896 days of cash as of June 30, 2023.

Dahan said the businesses have low debt and operating income and strong management teams.

“We would expect to see some fluctuations in revenues and expenses over the next year that could affect debt service coverage,” Dahan said. “However, I would not expect any further impact on outstanding debt.”

In western North Carolina, S&P also rates the Broad River Water Authority at A1 and $6 million in debt.

The “magnitude and strength of Hurricane Helene’s impact” suggests it could trigger technical or payment defaults, Municipal Market Analytics said in its Weekly Outlook article on Monday.

The shortfalls are most likely from “risky sector borrowers,” the MMA wrote, as single-project businesses are most vulnerable to severe disruptions such as facility evictions, “but even safe sector loans such as small GOs and utilities, can warn bondholders of their temporary potential. payment problems in the next few days.”

Moody’s assigned an E2 rating for neutral to low environmental risk exposure in its most recent reports on Asheville and Buncombe. In a July report, S&P said environmental, social and governance conditions did not have “significant influence on our credit rating analysis” of North Carolina, although it said the state was exposed to weather events due to his ribs. Moody’s says the state has somewhat increased the environmental risk to its credit.

While the short-term challenges to public finances in western North Carolina appear to be limited, the scale of the storm’s destruction may pose larger problems in the medium to long term.

Muni Credit Today editor Joseph Krist wondered what will be left after the flood waters recede and what will happen to the underlying economy and tax base.

“The region’s ability to rebuild its housing stock will go a long way in supporting the economic recovery,” Krist said. “They’re going to need workers, and housing has always been one of the most difficult issues to deal with after natural disasters. While FEMA will come with things like trailers, facilitating things like building inspections, building permits and (and) zoning is in full swing. on the shoulders of the local and county government”.

Over time, “There will be pressure to address deficiencies in stormwater management infrastructure,” Krist said. “One of the current fears is the potential for damaged septic infrastructure to put unanticipated flows into nonexistent or overburdened systems. That implies larger loans than expected.”

Howard Cure, Evercore Wealth Management’s director of municipal bond research, said, “As assessed and market property values ​​decline, cities and counties that rely on property taxes will potentially experience an impact on revenue.”

The storm’s impact could reverberate through the municipal bond market beyond the Southeast if property and casualty insurers have to sell bonds to meet claims, said John Mousseau, CEO of Cumberland Advisors.

Overall, the severity of the storm made analysts more cautious about the impact on climate change lending in general.

“There’s no doubt that Helene is on the Mount Rushmore of storms,” ​​Mousseau said. “Unfortunately, they may have company again sooner than we think, and that will certainly have a future impact on bond yield spreads in the affected areas.”

When Hurricanes Katrina (2005) and Harvey (2017) happened, people talked about them as once-in-10- or 20-year storms, said Tom Kozlik, director of municipal strategy and credit at Hilltop Securities. However, storms of this magnitude .

While the federal government will help rebuild areas of the Southeast affected by Helene, as these storms become more common, investors will begin to view them as important credit drivers for susceptible issuers, Kozlik said.

Inflation in recent years will increase costs for the government and other parties to rebuild in the Helene-hit area, Kozlik said.

Water and sewer systems are increasingly affected not only by storms, but also by increasing droughts, rainfall and rising levels of seals, Cure said.

“Knowing the condition of an existing system and its deferred maintenance needs will become an increasingly large part of a utility issuer’s credit quality analysis,” he said. This will inevitably lead to more capital costs and debt issuance.”

Kozlik said there are major storms like Helene driving insurance companies increase property insurance rates substantially or to stop providing insurance to parts of the country altogether.

“A slower and weaker potential recovery may also follow increasingly inadequate insurance coverage in the region,” MMA Weekly Outlook said. “Less than 3 percent of North Carolina homes have flood insurance, and an estimated 20 percent of Florida homeowners have no homeowner’s insurance.” This will likely focus the short-term recovery on wealthier and/or more politically important areas, MMA wrote.

“Systems with low liquidity, limited management and vulnerable infrastructure are most at risk of negative credit pressure in the utilities sector,” said Jenny Poree, S&P sector leader. “Increasing climate risk and aging infrastructure are two of the main factors contributing to our negative outlook on the water and sanitation sector and could lead to negative credit actions … following our assessment of the storm.”

Cure said one of the lessons of Helene is “you can no longer assume that simply because a utility is not on a vulnerable coast that hurricanes are not a real threat.”