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H2Oh! – Part 2 - Friday, 05/31/2013

Despite water's ubiquitous nature, I believe there are compelling reasons for investors in the municipal market to consider how changes to this indispensable, natural resource might alter long-held views about the water sector.

Loop Capital Markets writes in a recent report entitled, "Water Supply, Water Rights and the Impact on Economic Growth and Credit," that despite water scarcity, cities and states have overcome short-term supply issues and that rating downgrades because of water shortages are unlikely. The report addresses the depletion of aquifers serving the central U.S. farmland and the complicated federal and state legal frameworks governing water sourcing and interstate commerce. Accordingly, changes in traditional patterns of delivery or those attributable to weather may adversely impact economies of rural communities and antiquated systems. New infrastructure may bring trouble in the future: ".  .  . the American Society of Civil Engineers forecasts that by 2020 there will be a deficit for sustaining water delivery and wastewater treatment of $84 billion, causing an average annual loss in GDP of $42 billion from 2011 to 2020."

I believe investors should pay attention to consumers’ reactions to delivery rate increases as a possible consequence of municipalities conducting repairs and upgrades. As a result, greater issuance and spread widening in muni bonds are probable, in my view. The famous line from the movie Chinatown, "Either you bring the water to L.A. or you bring L.A. to the water," may soon apply to other parts of the country.

Water Image

Source: Loop Capital Markets, 2013.


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