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Weekly Preliminary OS Climate Risk Review (5/20/21)

By May 27, 2021 No Comments

This week’s issuer is financing a $100 million water park project that is soaked with exposure to sea level rise and coastal flooding risk. The encompassing city has a history of severe flooding, which has disproportionately impacted lower-income, minority communities. The property developer responsible for the project claims to be catering to these disenfranchised communities — affording the developer sales tax credits totaling upwards of $50 million — though denies sea level rise as a material risk. Oh, and it appears that the issuer pirated its climate risk disclosure clause from a 2018 Virginia-based financing authority official statement.

This week’s non-disclosure water pirate is:

The Atlantic County Improvement Authority Revenue Bonds — CIDC Atlantic City, LLC Project, Series 2021A/B ($95,130,000)

Atlantic County Improvement Authority’s (ACIA) proposed Island Water Park (Flood risQ Score 4.9) project consists of a 100,000 square foot indoor water park next to Atlantic City’s Showboat — a hotel, arcade, and former casino that was originally established in 1987. The Park is being labeled as Atlantic City’s “first-ever family friendly, year-round destination” as well as the “world’s very first, beach-front indoor water park, offering panoramic views of the Atlantic Ocean” (source). The project has been designated an entertainment retail district, a critical distinction allowing the park to qualify for $2.5 million in sales taxes annually over the next 20 years. The Park comes fully loaded, with water slides, lazy rivers, and party rooms.

(It’s too bad the lower-income communities that the issuer claims to be catering to won’t be able to use the ‘party rooms’ given that Atlantic City leads the nation in highest number of home foreclosures. More on that shortly…)

The project is being developed by Tower Investments, which shares common ownership with other entities involved in the project, including the entity leasing the land (Showboat Waterpark Land LLC), managing the Park (Showboat Waterpark Management LLC), and serving as the general contractor for the development (Accelerated Construction Company).

Digging into the (colossal 690 page) preliminary official statement, the only climate risk disclosure we find is on page 64, entitled Hurricanes, Flooding and Sea-Level Rise. The disclosure section leaves much to the imagination, and its remarks are confined to generalities. In fact, the contents of the climate risk disclosure are so generic, that we even found a 2018 Virginia Small Business Financing Authority official statement that used the same exact language. (We also found similar language in a 2016 Virginia Port Authority issuance, as well as a 2010 North Carolina State Ports Authority issuance). It seems like OS language is migrating north for some reason?

Below, a screenshot of the climate risk disclosure on page 34 of the 2018 Virginia Small Business Financing Authority official statement…

And, below, the ACIA’s 2021 pirated climate risk disclosure on page 64 of its preliminary official statement (the issuer didn’t even take the time to italicize the section header, tsk tsk…)

We’re not surprised that this week’s issuer copied its classmates’ answers before handing in their assignment. Chief Executive Officer of the project developer Tower Investments stated as recently as 2019 that climate change and sea level rise is “not an issue” and “it’s not been an issue and nobody discusses it.” It’s blatantly irresponsible for a developer to deny the impacts of sea level rise in Atlantic City, especially in light of the fact that the developer is taking advantage of the tax incentives afforded to it by leveraging the municipal debt market, while lower-income homeowners struggle to afford housing and secure work within the City.

According to the New Jersey Casino Reinvestment Development Authority (CRDA) — the agency that signed off on designating the Island Water Park as an entertainment retail district partially exempt from its sales tax obligations — the financing secured through municipal debt issuances “should benefit the public at large and those of low and moderate income in particular.” While the proposed project (ostensibly) claims to have a positive social impact, there is clearly damage in denying and failing to disclose the impacts of increasingly common flooding to the population it claims to serve. Flooding has had an outsized impact on lower-income and minority communities within Atlantic City for years, especially as the tourism industry has been hit hard over the past decade. Residents in the City are already struggling and have limited alternatives when it comes to relocating — the median household income in Atlantic City is just $27,000 (1st percentile nationally), the poverty rate is 41% (99th percentile nationally), lack of health insurance is 20% (98th percentile statewide), and per capita income is just $19,000 (3rd percentile statewide). The housing market is also struggling — as recently as 2017, houses on the frequently flooded Arizona Avenue in Atlantic City sold for less than $40,000. Gambling and night-life that once attracted visitors to the City has seen a steady decline, which is a problem for a city where 57% of total jobs are in the Accommodation and Food Services sector, ranking in the 100th percentile both nationally and statewide. 

The socioeconomic outlook for Atlantic City is bleak to say the least, and has been growing increasingly bleak in recent decades. In the face of climate change, the outlook is most dire for the financially stressed communities that rely on the tourism industry for jobs. Increased flooding from sea level rise continues to drive up insurance rates in the City, leaving many lower-income homeowners holding the bag. The encompassing Atlantic County has seen -3.4% population growth (1st percentile, nationally) and -4.7% real estate value growth (20th percentile, nationally) during the 2012-2018 period. The County ranks high (in the 98th percentile) for National Flood Insurance Program claims during the 2000-2019 period, with approximately $59,000 in NFIP claims per capita.

The most prominent threat to the Island Water Park and its surrounding area is coastal flooding, given that Atlantic City sits just 7 feet above sea level. In the current year of 2021, the annual expected property value-at-risk in the area within a 20-minute drivetime of the Park (which includes Atlantic City and parts of the neighboring communities) is ~5%, ranking in the 99th percentile nationally. The numbers grow unbearably high as we push our time horizon out into the future. During the 20-year period out to 2041, Atlantic City is expected to experience 105% property VaR and a whopping 217% GDP impairment. Those numbers wouldn’t come as a surprise to the National Oceanic and Atmospheric Administration (NOAA), which estimates that by 2050 Atlantic City will see between 65 and 155 high-tide flooding episodes a year. (*Any value at risk percentage above 100% means that risQ projects the issuer in question could sustain cumulative losses above 100% of aggregate property or GDP value between now and the specified time horizon).

As sea level’s rise, coastal flooding and storm surge events will continue to grow in frequency and intensity. Even without considering the impacts of warming sea surface temperatures caused by climate change, these events are already high probability and will have a high impact on Atlantic City. Superstorm Sandy is evidence of this fact, which caused casinos in the City to close and lead to a 28 percent drop in revenues during the month of November in 2012. Taking a look at the risQ UI Dashboard, the current probability of a Cat 1 hurricane event striking Atlantic City in a given year is .34%, equating to a 6.6% probability over a 20-year time horizon (the same 20-year period in which the Park developer will be credited $50 million in sales tax rebates). An event of this magnitude would result in 30% property VaR and, maybe even more important for this struggling economy in Atlantic City, 56% annual GDP impairment, both ranking in the 99th percentile nationally.

Let’s recap with a shortlist of ESG pros and cons for the Island Water Park project and surrounding area of Atlantic City:

Cons:

  1. $100 million water park project that has heavy exposure to sea level rise and coastal flooding risk
  2. Seasoned entertainment property developer that claims sea level rise is not an issue
  3. $50 million in tax credits over 20 years despite Atlantic City’s already dire socioeconomic outlook where 41% live under poverty level and per capita income ranks 3rd percentile statewide
  4. Atlantic City leads the nation in highest number of home foreclosures
  5. -3.4% population growth and -4.7% real estate value growth in Atlantic County
  6. The issuer, Atlantic County Improvement Authority, pirated its climate risk disclosure from a 2018 (or, maybe even earlier?) official statement

Pros

  1. The Island Water Park comes fully loaded, with water slides, lazy rivers, and party rooms

If you’re looking to invest in ESG, you should look somewhere else.

Honorable Mentions

Louisiana Local Government Environ. Facs CDA, LA – Assumption Parish GOMESA (risQ Score 3.6; Flood risQ Score 4.7)

There is a brief description of the use of proceeds on a couple of paragraphs in page 3-4, which at face value sound positive. The focus is on bayous, canals, levees and street drainage that will help mitigate flooding. Assisting with mitigating the impacts of climate change on the Parish is also specifically mentioned in the same short passage of text. Just as well too, as the Parish is 100th percentile for inland flooding nationally and 98th percentile overall once all the various risks are considered. No real specifics on the projects are mentioned beyond that very loose paragraph or two so no telling if the projects will address the major risks.

That’s not where this POS gets interesting though. The funds to pay off this debt relies upon taxes from the continuation and expansion of oil and gas operations in the proximate Gulf area. You can find the second mention of “climate” in the POS on page 11 with respect to recent Executive Orders used in the context of “Climate Crises”. The POS talks about potential risks to continuing oil and gas leasing and production but certainly doesn’t convey the near-term risk or acknowledge the undeniable secular trend away from fossil fuel operational expansion. This is also akin to localizing the proceeds and socializing cost. All the non-Gulf locations dealing with the impacts of climate change don’t see the revenue being drawn on in the GOMESA program, but are most assuredly dealing with the impact.

We can’t imagine why any investor with any ESG sensibilities would engage in this series of bonds, despite the project’s stated goals. Other sources of revenue from the state can be used for climate risk mitigation and adaptation that don’t tacitly approve of the very activities that are causing the problem.

Port Neches-Groves Independent School District, TX (risQ Score 3.8; Flood risQ Score 2.9; Hurricane risQ Score 2.8)

A coastal Texas school district at the Louisiana state line with a POS that mentions “flood” twice and neither with any mention of specific risks or actions, mentions “climate” once but only in the context of investment allocations, and only mentions “hurricane” a couple of times in financial tables in the appendix. Not of that makes any sense given the risk profile we can see, nor the recent history of the last 5 years, let alone the series of hurricane events in 2020. 

We tried to find other evidence of flood mitigation in other places, but neither Jefferson County where the district resides, nor Groves or Port Neches as the major cities in the district are listed as being part of the NFIP’s Community Rating Survey (CRS). We could certainly find evidence that flooding is a problem in the area. The county as a whole is 99th percentile for NFIP losses/capita/year since 2000 at over $110,000 per year (!!!). The growth in market value of property in the county is in the bottom 10% of all counties across Texas (25th out of 254), wherein we know a correlation exists between flood risk and property value

Note also that the risQ Scores listed above are for 2031 according to the call date, but the strip of maturities on the $65 million extends out to 2046. By that date, the overall risQ Score escalates to 4.4. How will property value and damage to property be looking by then and with that level of extreme risk? Still climate change isn’t a thing if you go by the POS.

City of Houston Combined Utility System, TX (risQ Score 3.6; Flood risQ Score 2.7)

As you might expect given Houston’s Harvey-enhanced climate risk notoriety, no escaping some discussion of risk in the city’s water and sewer system POS. On page 69-70 there is a significant discussion of Weather, Storm Activity and Periodic Flooding. This includes a mention of the NFIP CRS status for both the city (5 out of 11, where a 1 is best) and Harris County (7 out of 11) on page 69 and the reduced flood insurance premiums residents and business owners experience as a result. It still amazes us why more issuers don’t use this “free” piece of information. We hope that our clients do. 

Below that on page 70, there is the inevitable (one would hope, for any southeastern Texas issuer) discussion of Hurricane Harvey and its impact. The event did quite some damage to the water and sewer system’s assets and they’re still piecing together the funding to pay for it all. All things considered, thats the good stuff. 

The city also contributes to the Harris County Flood Control District as part of $142 million in TIRZ contributions. That said, the HCFCD is still $1.4 billion short of funds for projects it approved and issued bonds for in 2018. This of course will impact projects with Houston’s city limits as well.  We couldn’t find any mention of this in the POS.

The problems in the POS come more broadly from the lack of any specific mention of climate change or the need to prepare for even more common extreme climate events. “Climate change” does not appear once in the document. We’re looking at $355 million in par value here, and that extends out to a 2040 maturity and a risQ Score at that date of 3.8. Beyond that, the POS is entirely silent on the specifics of investment in climate adaptation and resilience by the utility itself to avoid a repeat of Harvey’s damage or the amount of water the utility will assuredly be periodically faced with in the future. There are loose references to projects under consideration such as home buyouts, home elevation and home reconstruction, but how about the actual water and sewer system?

Pasco County School District, FL (risQ Score 3.7; Flood risQ Score 3.8)

It looks like the Pasco County School Board thought the POS from the Volusia County School Board that we discussed last week was plenty good for their purposes. A straight copy/paste with all the inherent flaws and casting of doubt on if climate change will happen and what might happen if it did (see page 76, and compare to page 82 in the Volusia County School Board’s POS last week). The same applies for the short and uninformative Natural Disasters section that follows, although Pasco deleted Volusia’s short mention of Hurricane Dorian’s impact and just went with bland and non-descript. Finally, the district has also had to reduce flood insurance coverage as its become too expense, again as captured by their Volusia brethren. It is a trend that property insurance costs are going up in Florida for both residential and non-residential building owners. Every single school district in Florida seem to be decreasing insurance coverage with climate change and all its impact staring them in the face.

Again, being a GO bond, only around 25% of the flood risk to residential property is insured is a problem as property value will most assuredly decrease as it becomes increasingly untenable financially. Even more so for a county at the 97th percentile nationally and right at the risQiest 1/3 of school districts in the state of Florida.

The good news on this one for investors is that Assured Guaranty has your back on this one.

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