Climate Risk (pseudo-)Disclosure of the Week: 5/26-5/29

By May 28, 2020 May 29th, 2020 No Comments

Today’s Preliminary Official Statement (POS) analysis: City of Tampa, Florida bonds issued on behalf of the University of Tampa (UT). While the issuer recognizes its climate exposure in the POS, it’s a boilerplate recognition at best — a pseudo-disclosure.

This week’s climate risk pseudo-disclosure distinction goes to:

        City of Tampa, Florida — University of Tampa Project

The Series 2020 Bonds are being issued primarily to finance educational facilities and refund the outstanding University of Tampa Project Series 2012A / 2012C bonds. The bonds are secured by a pledge of UT’s unrestricted gross revenues. UT is directly positioned on the Hillsborough River, which runs into the Sedon Channel and Hillsborough Bay, and into the much larger Tampa Bay harbor.

For higher education, like other point-in-space service providers, understanding the risk to the facility as well as the surrounding area is critical. The University of Tampa’s immediate area, out to a 9 minute drive-time distance is in the 95th percentile of higher ed campuses nationally in terms of GDP impairment risk and in the 94th percentile in terms of property value at risk.

The Series’ maturity date schedule runs from 2021 out to 2032 annually, and also comprises longer-date bonds that mature in the year 2035 (coupon of 3.65) and 2042 (coupon of 4.15). The cumulative property value at risk is 22% to the 2032 maturity, but more than doubles to 50% for 2042 as a result of climate change and the additional 10 years of accumulating risk. Almost $8m of 2042 UT paper was scooped up last Friday, with a yield-to-maturity of 4.149%.

The structure of the risk close to campus is also important to consider. The 4-6 minute drive-time bands from the center of campus have higher risk, an areas likely to be heavy in student accommodation and lifestyle, which is also consistent with the demographic metrics we have for these drive-time bands.

Tampa Bay hasn’t experienced catastrophic hurricane damage since the Tarpon Springs Hurricane of 1921, which resulted in an 11-foot storm surge, eight dead, widespread residential property destruction, and an entire crop of citrus destroyed (source). Approximately $10 million in damage was sustained at the time, but adjust for inflation and that the population of the City of Tampa in 1921 was a mere 50,000 (versus 390,000 today) and the math starts to look different. .

While Tampa Bay has been fortunate to avoid adverse weather events in recent decades, the lack of hurricane activity has left the City of Tampa exposed and relatively climate-insouciant. There is sparse mention of climate change and hurricane risk in the POS in question.

  • Natural and Other Disasters (pg. 32) — “The State of Florida is naturally susceptible to the effects of extreme weather events and natural disasters including floods, droughts, hurricanes and tornadoes, which could result in negative economic impacts on the Borrower. Such effects can be exacerbated by a longer term shift in the climate over several decades (commonly referred to as climate change), including increasing global temperatures and rising sea levels. The occurrence of such extreme weather events could damage facilities of the Borrower. The economic impacts resulting from such extreme weather events could include a loss of revenue, interruption of services, escalated recovery costs, and increased insurance costs.”
  • Other Factors Affecting the Financial Performance of the Borrower; Natural and Other Disasters (pg. 29) — The occurrence of natural disasters, such as hurricanes, tornadoes, floods or droughts, or other disasters could damage the Borrower’s facilities, interrupt services or otherwise impair operations and the ability of the Borrower to produce revenues.

There is a (cursory) awareness and disclosure of the impacts that climate change and hurricane activity could pose to the City’s and University’s revenue streams and credit quality; however, the lack of quantitative detail regarding these risks is apparent. There is no mention of proactive resilience and adaptation enhancement efforts, and no forward-looking projections of climate risk. Is there a finite possibility that Tampa Bay will continue to experience limited hurricane activity over the next 2 decades, even after we adjust for rising sea levels and increasing hurricane risk? Of course. But it’s a high-stakes game of Russian roulette.

In 2020, the Cat 1 hurricane event probability is 2.38% but carrying that probability out each year and factoring in climate change amplifies the math. Wihout climate change factored in, there is a 57% probability of a Cat 1 hurricane by 2050, and that grows to 67% using a likely climate change scenario. A robust Cat 4 hurricane checks in at 31% probability in the same time-frame, the storm surge from which (in the absence of new climate resiliency measures) would could 77% equivalent value property loss.

Climate change is a risk multiplier. risQ projects that the value-at-risk figures and event probabilities are expected to increase substantially over the coming 10-20 years as a function of the changing climate. To reiterate: yield-to-maturity for the 2042 UT bonds is currently priced at 4.15%. Both S&P and Fitch have provided A- ratings for the 2042 paper.

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