As you all know, we have long extolled the virtues of the municipal bond market in simple terms: an approximately $4 trillion marketplace that, we believe, is highly diversified (across approximately 50,000 issuers), high quality, has a low incidence of default and is a source of income that is generally free from federal taxes. Now, there is another element to be added under this banner, which is likely to appeal greatly to investors: acute attention to the risks of climate change.
As discussed in a recent Bloomberg Daily Brief1 from Joe Mysak, as well as industry conferences across the country, climate change issues and concerns are now finding a prominent place in the representation of Issuer Risks in Preliminary and Final Official Statements. Preliminary and Final Official Statements are the legal and contractual documents issuers convey to bankers and underwriters to bring bonds to the market for sale. They can be several hundred pages long, addressing myriad topics relevant to both the execution of the promise to pay and the determination of credit quality.
Now, to their credit, more disclosure relevant to climate change specific to the issuers of the bonds is finding its way into these documents. Not only do states and municipalities who issue municipal bonds find themselves having to address climate change risk, it is now falling to the rating agencies to incorporate this risk into their template for assessing creditworthiness and future ability to repay debt.
This quotation from the aforementioned Bloomberg Daily Brief makes the point. Though climate change has been with us for decades, change for the better, for the muni market, is here as well:
“These details are all contained in the lengthy Risk Factors or Investment Considerations sections in the offering documents to their bond issues, priced within the last few weeks, and in Hawaii’s case ($105 million highway revenue bonds), this week. Such a level of disclosure remains the exception, but keep in mind climate change didn’t really become a thing in MuniLand until relatively recently.”2
1Bloomberg Briefs: DAILY BRIEF: MUNI, Diary, Water, Wildfire Spur Climate Change Disclosure, November 12, 2019
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Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.
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