Public finance concerns remain as North Carolina digs out from Helene

The devastation Hurricane Helene rained on the mountain region of western North Carolina can be handled financially by governments in the short term but other municipal issuers may struggle and the long term is cloudy, analysts say.

Helene hammered the area from Friday through Sunday, bringing rainfall amounts up to 31.3 inches, hurricane winds up to 106 miles per hour and several tornadoes. North Carolina is continuing to count deaths and the storm may become its most deadly ever, eclipsing the 80 dead from a 1916 flood.

The biggest city in the region is Asheville, population 94,000, and its government says restoring service to its full water system could potentially take weeks.

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

North Carolina has triple-A ratings across the board. As of July 1, it had about $4.75 billion in its rainy-day fund, about 15.9% of its enacted budget. Additionally, 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 will be the likes that we've never seen in the state of North Carolina but I think we're financially in good shape to, no pun intended, weather that storm," State Treasurer Dale Folwell told The Bond Buyer. The state has retired 66% of its debt over the last eight years and the state has money in its rainy-day fund, he said.

"I wouldn't trade places with any other state treasurer as we face the financial uncertainty of this topic," Folwell said.

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

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

The Asheville Regional Airport remains open and is taking passenger as well as relief flights, said Doug Kilkommons, managing director at KBRA. The authority has very little debt service due until fiscal 2026, which puts it in a good position to handle the current disruption.

Kilkommons said he expected the volume of passengers and flights to go down for a few months but then ramp up again. Enplanement growth has been quite strong in recent years. The airport benefits from a strong management team.

The most impacted county was Buncombe County, with its seat in Asheville; the county government is rated Aaa by Moody's and the Metropolitan Sewerage District of Buncombe County 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 net unrestricted cash.

"I don't have much insight into how the storm has affected either Asheville Water or Buncombe Metro Sewer operationally, but it's clear that damage is significant," said Lauren Dahan, a Moody's vice president and senior analyst. "I don't expect any credit impact at this time, though we will continue to monitor all affected issuers."

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

Dahan said the enterprises have low debt to operating revenue ratios and strong management teams.

"We would expect to see some fluctuations in revenues and expenditures over the next year, which could impact debt service coverage," Dahan said. "I wouldn't expect any other impacts to outstanding debt though."

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

The "breadth and strength of Hurricane Helene's impact" suggest it may trigger technical or payment defaults, Municipal Market Analytics said Monday in its Weekly Outlook piece.

Defaults are most likely from "risky sector borrowers," MMA wrote, because single-project enterprises are most vulnerable to severe disruptions like facility evacuation, "but even safe sector credits, like small GOs and utilities, may warn bondholders of their potential for temporary payment issues in the coming days."

Moody's assigned an E2 rating for neutral to low exposure to environmental risks in its most recent reports on Asheville and Buncombe. In a July report, S&P said environmental, social and governance conditions had no "material influence on our credit rating analysis" of North Carolina though it said that the state had exposure to weather events due its coastline. Moody's says the state has somewhat elevated environmental risk to its credit.

While Western North Carolina's short-term public finance challenges appear to be limited, the scale of the storm's destruction may generate larger problems in the medium-term and long-term.

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

"The ability of the region to restore its housing stock will go a long way to supporting an economic recovery," Krist said. "They will need workers and housing has always been one of the hardest issues to deal with after natural disasters. While FEMA will come up with things like trailers, the facilitation of things like building inspections, permitting for construction, [and] zoning lies squarely on the shoulders of local and county government."

Over time, "There will be pressure to address shortcomings in the stormwater management infrastructure," Krist said. "One of the current fears is the potential for damaged septic infrastructure putting unanticipated flows into non-existent or overtaxed systems. That implies greater than expected borrowing."

Howard Cure, Evercore Wealth Management director of municipal bond research, said, "To the extent that assessed and market values of properties go down, cities and counties, that are reliant on property taxes, will potentially take a hit in revenues."

The storm's impact may reverberate in the municipal bond market beyond the Southeast if property and casualty insurers need to sell bonds to meet claims, said John Mousseau, CEO of Cumberland Advisors.

More generally, the severity of the storm has made analysts more cautious about climate change's credit impact generally.

"There is no question Helene is on the Mount Rushmore of storms," Mousseau said. "Sadly, she may have company again sooner than we think and that certainly has impact down the road on yield spreads on bonds in affected areas."

When Hurricanes Katrina (2005) and Harvey (2017) happened, people spoke of them as storms that would happen once every 10 or 20 years, said Tom Kozlik, director of municipal strategy and credit at Hilltop Securities. However, storms on that scale have been arriving more frequently.

While the federal government will help rebuild Helene-impacted Southeast areas, as these storms become more common investors will begin to look at them as important credit factors for susceptible issuers, Kozlik said.

Recent years' inflation will increase the costs to government and other parties to rebuild in the area hit by Helene, Kozlik said.

Water and sewer systems are increasingly challenged not only by storms but increasing droughts, precipitation and seal-level rise, Cure said.

"Knowing the condition of an existing system and its deferred maintenance needs will become an increasing part of an analysis for the credit quality of a utility issuer," he said. This will also, inevitably, lead to more capital costs and debt issuance."

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

"A potential slower and weaker recovery may also follow increasingly inadequate insurance coverage in the region," the MMA Weekly Outlook said. "Less than 3% of North Carolina homes have flood insurance and an estimated 20% of Florida homeowners do not carry any property insurance." That is likely to center near-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 for negative credit pressure in the utility sector," said Jenny Poree, S&P sector lead. "Rising climate risk and aged infrastructure are two of the primary contributors to the negative outlook we have on the water and sewer sector and may result in negative credit action ? 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 aren't a real threat."