CONTRIBUTORS
Jennifer Johnston
Director of Research, Municipal Bonds,
Franklin Templeton Fixed Income
Our hearts go out to all the communities impacted by the hurricanes, the deadliest storm to hit the mainland United States in almost two decades. As the country grieves and people begin to rebuild, some of our investors might wish to know what impact such natural disasters can have on their municipal (muni) bond investments.
The Franklin Templeton Fixed Income (FTFI) Muni Bond Research Team has seen many such events and, while each is unique, there are similarities regarding what one can expect to happen in the aftermath.
Over the immediate period following a natural disaster, the main focus is on protecting public health, making sure that essential services such as water and power are working, and securing access to food. Once that is done, muni issuers like state and local governments will focus on taking stock of assets to determine what has been damaged. It is important to note that individuals, companies and municipalities will usually have access to both private insurance and Federal Emergency Management Agency (FEMA) funds to support their recovery.
We have not generally seen disruptions in debt service payments following past natural disasters. In some cases, issuers have had to rely on bond insurance, debt service reserves and even temporary state support in order to meet their obligations. On the back of this, it is possible that there will be some short-term implications for the credit ratings of certain issuers. However, we don’t expect any widespread defaults and, moreover, anticipate that over the medium to longer term most of these communities will be able to rebuild and regrow their economies. Many of the hardest-hit communities are AAA-rated cities, counties and states with reserves and strong management that will help recovery efforts.
Of course, rebuilding could take years, and critical assets will have to be addressed first. Muni bonds will probably be used to fund many of these projects, as they are the go-to source for financing infrastructure in the United States. While the loss of life and property is devastating, the rebuilding effort often results in some positive benefits as well. Infrastructure is generally built back stronger than before, and the process usually helps to boost local economies. The silver lining is that we have seen several cities come back stronger after the disasters they faced, with New Orleans, for example, actually rated higher today than it was pre-Katrina.
Our muni bond research analysts are closely following our investments in the impacted areas and assessing internally what we expect regarding potential revenue disruptions, rebuilding needs and recovery timelines.
In summary, while the process of healing after hurricanes will not be an easy one, we think these communities have ample resources to help them rebuild, recover and come back stronger than before.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
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