(Bloomberg) -- As Hurricane Milton barrels toward Florida threatening massive storm surges in the Tampa Bay area, roughly $30 billion of municipal debt is at risk, according to an analysis from Bloomberg Intelligence.
That includes bonds sold to finance hospitals, utility systems and senior living homes. Florida borrowers have raced to the state and local government debt market this year on the heels of a population surge that required updated infrastructure. The Bloomberg Intelligence analysis identified tax-backed and revenue-supported debt sold by localities within the most at-risk evacuation areas.
“A worst case scenario could cause impairment issues across the municipal spectrum, especially for those credits who have limited financial cushion already,” said Eric Kazatsky, senior US municipals strategist at Bloomberg Intelligence.
Hurricane Milton is expected to make landfall in Florida late Wednesday or early Thursday, with winds strong enough to tear homes apart and a storm surge capable of swamping some coastal cities. The storm comes less than two weeks after Hurricane Helene caused deadly flooding in North Carolina — highlighting the brutal and increasingly frequent nature of modern-day storms. The back-to-back events have forced muni investors to consider the risks of buying bonds in areas vulnerable to major storms, even as local government bond defaults are incredibly rare.
“The magnitude of this storm and the fact that it’s right after Hurricane Helene, it’s likely to intensify the discussion about climate risks and the muni market,” said Cooper Howard, fixed income strategist at Charles Schwab Corp.
Bonds that are most vulnerable are those supported by one stream of revenue, like a single-site hospital for example. Debt issued by large cities and counties are more insulated because they have multiple levers to pull to eventually pay back investors.
“I don’t think anybody is worried about the state of Florida existing and being able to pay their bills,” said Jeff Scruggs, head of the public sector and infrastructure group at Goldman Sachs Group Inc. “But if you have a project that is reliant upon the revenue generated in that area and is very specific to that area, you do have to consider it.”
To be sure, municipal defaults because of extreme weather are very rare. Occasionally governments will pay bondholders late because of widespread power outages or other storm impacts — but true missed payments are unusual.
“While we are very concerned about the potential impact on the communities, from an investment perspective we are comfortable that the municipal bonds for the areas in the line of the storm will be okay,” said Daniel Solender, head of municipal investments at Lord Abbett & Co. “Historically insurance has covered the damage and the investments have kept paying.”
Florida’s fragile property market is backstopped by a state-backed reinsurance program known as the Florida Hurricane Catastrophe Fund. That program has roughly $7 billion in projected reserves, though when Hurricane Ian hit the state in 2022, losses totaled an estimated $9.5 billion. Additionally, the Federal Emergency Management Agency’s disaster fund, which finances rebuilding efforts, could be within weeks of running out of cash. The same goes for FEMA’s flood insurance program.
Meanwhile, municipal bond bankers and analysts expect sales to increase in the coming year as governments prepare for climate resiliency measures. Naples, Florida, for example sold debt this summer to rebuild its famous pier that was ravaged by Hurricane Ian.
The pier, which has been rebuilt because of storm damage at least five times, is expected to start construction around the end of the year.
--With assistance from Nic Querolo.
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