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Climate Risk (non-)Disclosure of the Week: 9/14 to 9/18

By September 24, 2020 No Comments

Its is often the smaller issuers that do the poorest job of disclosing climate risk, but is also the smallest issuers who could be the most financially vulnerable to those very same climate events they fail to disclose. So, while certain deals are often too small for some of our clients to even look at, we’re going to highlight one this week. The climate risk (non-) disclosure low-light for this week goes to the City of Horseshoe Bay, TX and it’s $3.3 million of special assessment revenue bonds for the Escondido development, the official statement for which can be found here.

Its often too easy to mess with Texas when it comes to climate risk given the gulf coast’s frequency of hurricanes, but Horseshoe Bay is not on the coast. It sits about 50 miles northwest of Austin on the shore of Lake Lyndon B. Johnson. The city is 92nd percentile overall for climate risk to property for  cities nationally and that’s critical given the nature of the special assessment. It is 91st percentile for inland flood and 95th percentile for hurricane flood. The Escondido development itself is low-lying with creeks and water features throughout, and is higher risk than Horseshoe Bay overall.

The sum total of climate risk in the OS can be found on page 42: “All of the State, including the City, is subject to extreme weather events that can cause loss of life and damage to property through weather events that can include strong winds, flooding and heavy rains. It is impossible to predict such weather events and the impact they may have on the City, including land within the district.” That’s weak to the point of being useless and shouldn’t meet the standard for a discerning investor, let alone one claiming to have an ESG strategy.

Here are a few items that might have been mentioned instead. As recently as 2018, the Llano County, including the Horseshoe Bay area, suffered from massive flooding with some areas seeing levels 30 feet above the local flood stage. Llano County as a whole is in the worst 2% of counties nationally in terms of NFIP claims/capita/year (at over $35,000 on that metric), while Burnet County is in the worst 4%. Those expecting FEMA-driven flood plain insurance to shore everything up will be disappointed to know that over 70% of the flood risk to property is not captured by FEMA’s current flood plains. For the county as a whole, we estimate that 91% of the flood risk is not insured. This all adds up to historical evidence of risk and overt lack of financial resilience to future risk for property owners and for the municipal bonds that rely on that property base.

The largest par value CUSIP in the series has a 2030 maturity, so we’ll run some numbers on that. Cumulative Property Value at Risk (VaR) is 23% to 2030, with close to 18% for inland flood specifically. If only 9% of that is insured, around 21% of the total property value is going to need to look elsewhere for the dollars to repair or rebuild over this 10 year period. The typical Hurricane Flood event has a 34% Property VaR and an annualized 1.2% probability of occurring in 2020. Factoring in climate change you have around a 12% probability of such a long-tail event occurring. No mention of climate change in the OS, mind you.

The combination of all these numbers screams being well above the bar for potential material risk to the underlying assets and the revenue stream they must deliver. Can weather events be predicted, specifically? No. Can past history and reasonable models be used to deliver probabilistic metrics in a way that appropriately discloses risk to investors and stakeholders? Absolutely.

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