Hurricane Helene's landfall as a Category 4 storm caused devastating flooding and destruction across five states, with more than 200 people reported dead and hundreds of thousands without power. Still reeling from Helene, Hurricane Milton made landfall two weeks later causing additional destruction in the state. In the wake of Helene, President Biden declared a state of emergency, authorizing the Department of Homeland Security (DHS) and the Federal Emergency Management Agency (FEMA) to coordinate disaster relief and protect lives and property.
In recent years, the frequency of natural disasters has been accelerating, making it increasingly important for municipal investors to evaluate environmental and climate risks for state and local government issuers. According to the National Oceanic and Atmospheric Administration (NOAA), the U.S. recorded 131 disasters costing $1 billion or more between 2010 and 2019, up from 67 events between 2000 and 2009. More recently, from 2019 to 2023, the U.S. recorded 102 similar events with total costs exceeding $605 billion. Severe storms like Helene and Milton are associated with the greatest number of billion-dollar events.1
Deadliest Hurricanes to Hit U.S. Territory Since 1950
Assessing risks for municipal bonds
Despite an uptick in damage from weather-related events, municipal credit has historically been resilient, but significant climate events in recent years have exposed municipal issuers to an increase in credit impairments and some defaults. According to Municipal Market Analytics, a dozen municipal issuers have filed an event notice explicitly attributing a technical or payment default to a natural disaster. While these defaults tend to be concentrated in the high-yield sector with single-site project risk, there have been some defaults in historically safer general obligation (GO) and water and sewer sectors. Considering the significant damage caused by Helene and Milton, some issuers may experience technical defaults and spreads may widen on certain credits. However, we do not foresee a systematic risk for the impacted regions.
The economic losses from natural disasters can be immense, but most losses have historically been covered by private insurance or federal governmental aid. For example, FEMA often covers 75% or more of all disaster-related costs for local governments, but reimbursement may be unpredictable due to the federal agency's strained budget. After another year of heavy disaster-related outlays, in August FEMA paused all non-emergency, non-lifesaving projects in order to conserve cash. However, in days following the storm, FEMA reported that it was in a good position to respond to Helene. On October 1, the agency received nearly $20.3 billion under the stopgap funding package Biden signed during the last week of September.
In our view, it has become critically important to incorporate the increased environmental risks into our investment decision-making process. This is because, over time, climate change may result in population shifts, declining tax bases and increasing debt loads, which could lead to credit stress. We incorporate key metrics related to the risks of climate change into our overall credit analysis. This analysis may include whether the municipality has enacted resiliency plans to combat risks from weather-related events, such as seawall construction, elevation of roadways to alleviate flooding and requiring sturdier construction to withstand severe storms.
Bottom line:
As the frequency and damage of weather-related events continues to rise, we believe that incorporating climate risk into the credit-evaluation process for state and local issuers is increasingly critical for municipal bond investors.1"Navigating Uncertainty: U.S. Governments and Physical Climate Risk," S&P Global Ratings, April 2024.
