10/07/2020

Credit Research & The Risk of Unplanned Events

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With wildfires consuming significant portions of western states, hurricanes impacting the Gulf and East Coast, and droughts and floods in-between, it is evident that climate risk and natural disasters have become an important consideration for investors.

These events are occurring with increasing frequency, and on larger scales. As a result, urban areas where large and typically higher rated municipal bond issuers are located have seen an increased risk of damage, which is only expected to grow.

As a municipal bond fund manager, knowing we can’t change the unpredictable nature of these events, we focus our credit research on finding municipal bond issuers that we believe are better prepared to withstand the financial challenges these events may pose.

Hurricanes, fires, floods, and other disasters present municipal bond issuers with a variety of risks including population declines threatening property tax revenues, revenue loss and increased operation and maintenance costs to maintain infrastructure.

Management of Aquila’s seven single-state municipal bond funds begins with the assessment of risk.

Although disclosure of natural disaster and climate related risks by municipalities remains minimal, we are able to focus our credit research efforts on examining the ability of local governments to respond to unforeseen incidents through a variety of criteria including: fund balance levels and policies, liquidity metrics, debt metrics and debt management policies, pension funding and other post-employment benefits exposure, and reviewing revenue concentrations.

Our credit reviews are performed with awareness of climate challenges faced by issuers, and prior occurrence of natural disasters, and we monitor holdings regularly for developments. Our local surveillance is one of the critical components of our process and includes a review of individual credit reports by our credit committees, which typically meet on a quarterly basis, and have been convening more frequently since the onset of COVID-19.

Although there are many differences between the global pandemic and the wildfires burning across the western states, both events were unforeseen and both have the potential to have an acute impact on local government finances. In this era of pandemics, pension crisis and various climate related threats, we believe credit research is more important than ever.

 

Before investing in the Fund, carefully read about and consider the investment objectives, risks, charges, expenses and other information found in the Fund perspective. The prospectus is available on this site, from your financial advisor or when you call (800) 437-1020.

Mutual fund investing involves risk. Loss of principle is possible. Investments in bonds may decline in value due to rising interest rates, a real or perceived the chronic decline in credit quality of the issuer, borrower, counterparty or collateral, adverse tax or legislative changes, court decisions, market or economic conditions. Fund performance could be more volatile than that of funds with greater geographic diversification.