S&B COVID-19 IMPACT RISK
S&B has defined four levels of potential short-term risk to municipal credit quality related to the impact of COVID-19 in the U.S.: Level 3, Level 2, Level 1, and Limited. While each Risk Level indicates an increasing potential for revenue loss, the actual impact on credit quality and its duration will depend on the specific municipal bond sector, the pre-existing financial condition of the municipality, the location and local severity of the virus, as well as the demographics and economic makeup of each municipality. Although the S&B Rating and Risk Level are provided together, the S&B Rating reflects primarily current audited annual financial statements, whereas the Risk Level reflects the potential future impact on that credit rating.
S&B anticipates a significant short-term reduction in revenues as travel and demand for certain non-essential services are dramatically reduced. Additionally, municipalities most exposed to the health impacts of the pandemic face an increased risk of reduced credit quality.
Municipal Bond Sectors: Airports, ports, excise tax and hospitality bonds secured by hotels, motels, or other tourist revenues, bonds secured by nursing homes and assisted living facilities, stadiums or other cultural institutions, as well as general obligation issuers with severe, prolonged exposure to the virus.
S&B anticipates a moderate short-term reduction in revenues and/or increase in expenses due to structural changes in operations or business activity. Additionally, municipalities with revenues dependent upon tourism face an increased risk of reduced credit quality.
Municipal Bond Sectors: Hospitals, colleges and universities, community colleges, transportation, sales tax and other business or occupation tax bonds, special finance authorities, as well as general obligation bonds in areas highly dependent on tourism.
S&B anticipates a low to moderate short-term reduction in revenues tied to the application of stay-at-home orders, changes in work behavior, and the reduction of business workforce. Additionally, municipalities more reliant on revenues other than ad valorem taxes face an increased risk of a temporary decline.
Municipal Bond Sectors: Utilities, income tax bonds, non-ad valorem tax revenue bonds, as well as general obligation bonds with a higher concentration of sales and income tax revenues, including State governments.
S&B anticipates a limited net reduction in revenues in the near-term.
Municipal Bond Sectors: Most local governments, school districts, municipal utility districts, pledged ad valorem tax bonds, tax increment financing, housing authorities, and bond banks.
While every municipality faces emergency costs in addressing the Covid-19 outbreak, most are likely to attain State or Federal stimulus aid. The potential for more substantial revenue decline exists in the case of prolonged, stricter, widespread quarantine measures and a sustained reduction in economic activity, as well as the success of reopening measures. S&B believes that in the long-term, economic decline could affect property tax revenue and property values, increasing the risk of credit quality deterioration in general obligation securities as a whole. Issuers with stronger preexisting credit quality and greater reserves headed into the pandemic will be more insulated from insolvency. Rising unfunded pension liabilities could pose another challenge if financial markets do not recover losses from earlier in the year 2020 and public employees retire.
DISCLAIMER: The statements and information contained herein are our opinions only, and not a guarantee, and are based on public information available as of the date of any S&B Municipal Credit Rating (inclusive of S&B short term risk level related to the impact of COVID-19) only and may be based on both internal and/or external sources that S&B reasonably believes to be reliable. However, S&B cannot and does not guarantee the accuracy, timeliness or completeness of such information for any particular purpose and such information is not to be considered to be all-inclusive. This shall not be construed as an offer or as a solicitation of an offer to sell or purchase any securities that may be mentioned herein. The S&B Municipal Credit Rating (inclusive of the S&B short term risk level related to the impact of COVID-19) and S&B’s opinions expressed herein are based on information deemed current only at the date of the report only and are subject to change without notice or any further obligation on the part of S&B to update or otherwise revise the same. An S&B Rating assignment based on financial statements presented in other than Generally Accepted Accounting Principles in the United States (GAAP), including the cash basis of accounting, is not based on the full objective criteria utilized by S&B and is, therefore, limited in scope and does not contain all material information necessary to make an informed investment decision. No person should make an investment decision solely in reliance on the information contained herein. The S&B Municipal Credit Rating (inclusive of the S&B short term risk level related to the impact of COVID-19) is strictly as of the date of this report. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, COMPLETENESS, TIMELINESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR USE OR PURPOSE OF THIS RATING OR OTHER OPINION OR INFORMATION CONTAINED HEREIN IS GIVEN OR MADE BY S&B IN ANY FORM OR MANNER WHATSOEVER.
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