We usually focus on GO bond issuers that come to market, just because of their shear volume, but also because there is an expectation that they would be sensitive to climate risk on an ad valorem property tax base. This week, however, The St Johns County Industrial Development Authority came to market as a conduit issuer for a Florida hospital system, namely Flagler Health.
The Preliminary OS for this $102.4 million, 2050 maturity security can be found here.
Some quick metrics first: using a 30 minute drive-time catchment area for Flagler Hospital, the weighted climate risk of the hospital and the population it serves is 98th percentile nationally across all hospitals, and all specific peril metrics are at least 80th percentile nationally. These severities are essentially insensitive to catchment area used, and the overall risk percentile only goes up at shorter distances.
The OS provides a relatively robust assessment and disclosure of climate risk to the hospital, as it has past experience with top and bottom line financial impacts from hurricanes. Pages A39-40 provide some high level background on impacts of Hurricanes Matthew and Irma, although with less financial granularity than a 2017 Official Statement for $32 million of bonds. That OS indicated Matthew caused $5.4 million in operating loss over 5 months due to impact on the surrounding population, and Irma catalyzed a ~$1 million incremental operating loss impact. These are meaningful numbers for a hospital that has run in the $10 million bottom line range for the past 3 years, and that’s before taking negative impacts of COVID-19 in 2020 into account.
Again we see the invoking of FEMA floodplains on page A-39, which drives us insane. In this case, our data indicates close to double the flood risk reflected in FEMA’s flood plains for the county. That said, the hospital carries specific insurance for business interruption, named storm, and flood damage to the property, and Assured Guaranty have insured the bonds themselves, so investors can breathe a little easier when reading the following numbers:
By 2050, the probability of a Cat 1 hurricane or worse impacting St Johns County will increase to 2.1% annually under an RCP8.5 scenario, so a less than 50 year event. The probability of a Cat 3 hurricane or worse quadruples to 1.28% under the same scenario. For the latter, the property VaRs for the 30 minute catchment area are 35% for hurricane storm surge and 17% for hurricane (precip) flooding. For context, Matthew stayed offshore as a Cat 2 event so less impactful than the potential events described above would be.
Impact on the residents and their property are critical in this case, as those impacted move discretionary spending from high value medical procedures to repairing their property (as Flagler Hospital experienced with Matthew). For St Johns County, our data indicates that 62% of the flood risk is uninsured, so that’s a big revenue hole to fill for the hospital if its catchment area goes into repair mode.
So the OS does a decent job of discussing climate risk, although not as good as it did 3 years ago. It fails to account for climate change and how that will amplify financial risks that the hospital has already experienced first hand, and uses poor quality floodplain information to underpin any discussion of risk that is in the document. Then again, its not the investor’s problem. Other stakeholders are holding this baby.