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H2Oh! – Part 1 - Friday, 05/24/2013

Delivery of potable water is a high-quality, monopolistic enterprise and I believe it embodies the essential public purpose underpinning municipal finance.

Until headlines such as one from this past Monday’s The New York Times, "Wells Dry, Fertile Plains Steadily Turn to Dust" are more common, turning on the faucet to brush your teeth will remain routine and undeserving of a second thought. Our complacency stems from historic reliability of vast delivery systems nationwide.

In a report entitled "2012 Outlook: Water and Sewer Sector," Fitch indicates: "The outlook for the U.S. water and sewer sector is stable despite current economic, capital, and political pressures .  .  . and the average sector rating remains unchanged at AA." For investors, I see municipal water supply programs as a potential store of value in terms of their generally high credit quality. The water and sewer sector is the second largest weighting (15.18%) and the highest credit quality (AA1) among revenue bonds in the Barclays Municipal Bond Index1. The demand for water largely exceeds supply, which has historically meant strong financial results for these systems. But we cannot overlook the impact of drought and dwindling supply in any area of the country. In my view, the domino effect of collapsing supply could have serious implications for growth and economic vitality, leading to destabilization of the creditworthiness of some affected regions.

 

Barclays Municipal Revenue Bond Index by Sector/Credit
Barclays Municipal Revenue Bond Index by Sector/Credit

Source: Barclays as of 5/21/13.


My next commentary will detail areas for concern emanating from another point of view.

1The Barclays Municipal Bond Index is considered representative of the broad market for investment-grade, tax-exempt bonds with a maturity of at least one year.


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