NEW YORK--()--Fitch believes the short-term impact of Hurricane Sandy on many public finance institutions will be mitigated by their financial flexibility and support from the Federal Emergency Management Association (FEMA) and insurance policies. The following reflects results to date from research underway on Fitch-rated entities in the affected area.
The local governments affected by Sandy are likely to use a combination of FEMA funds and insurance claims to pay for most storm-related damage. While their lost revenue from taxes on business and other activities cannot be included in those claims, we believe their financial flexibility and the resumption of normal business operations will mitigate the risk posed by lost revenue. In many cases, following the initial interruption, economic activity and related tax revenue is likely to increase, as residents and business purchase materials related to repair and rebuilding and workers are hired to assist in this effort.
Many of the communities that suffered severe damage are part of Fitch-rated municipalities or counties with large and diverse tax bases, most of which survived the storm without significant entitywide damage. We expect damaged property in most communities to be rebuilt, maintaining tax bases, rather than see residents and businesses leave the area.
We expect smaller municipalities with low levels of liquidity before the storm to be the most affected. However, information-gathering from the most affected communities has been challenged by their immediate need to protect residents and by damage to governmental facilities. Information from which we can draw meaningful conclusions is therefore not yet available for this small number of rated entities, including a larger entity, Jersey City, NJ. We will stay in contact with them as appropriate and report on any significant findings that might affect credit quality.
The institutions rated by Fitch's higher education team experienced fairly limited disruption as a result of Hurricane Sandy. Some credits in the immediate impact zone were forced to close for a few days due primarily to the loss of electricity; however, most were operational within a few days. Therefore, we do not anticipate taking negative rating action solely as a result of the storm.
Fitch believes that most of its rated nonprofit hospitals weathered the storm with minimal financial impact. Most of the credits did not have facility damage and either canceled elective procedures in preparation for the storm or had some outpatient facilities closed due to power outages. This was mainly over a period of two or three days. The only credit in our portfolio that suffered extensive facility damage is NYU Medical Center. Fitch is monitoring the situation at NYU Medical Center, as their inpatient facility remains closed. For Fitch's rated nonprofit continuing care retirement communities in the area, none suffered extensive facility damage but we are evaluating the operational pressure on those that suffered power outages for an extended period.
In our view, the effect on the public power sector will also be minimal, with the exception of the Long Island Power Authority (Rating Outlook revised to Negative from Stable on Nov. 12, 2012). In the short run, we expect most issuers to utilize cash reserves and short-term borrowing to fund initial storm costs until FEMA funds and insurance payments are received. Over the longer term, gaps in external funding may result in a need to increase electricity rates. Should rate increases prove to be politically untenable, negative rating actions could result.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.