CARES Not Likely The Last Word On Muni Market Relief

It would be disingenuous to look upon the combination of Federal Reserve Board and congressional interventions as stimulus as they are simply designed to hopefully stabilize and secure the trading market and overall credit profile for the muni asset class and of course to far more broadly preserve the economy until it reopens for business, rather than to spark a demand that was actively there in the first place. Fiscal relief provided under the CARES Act should complement Fed intervention by channeling funds to various in-need segments of public finance.

A negative outlook to the not-for-profit healthcare sector is appropriate given cash-flow disruption and risk of declining revenue performance that will likely trail budgetary forecasts. We expect higher supply costs and other elevated expenditures to further pressure operating margins, and those providers with past experience in these types of viral outbreaks may be better positioned to achieve quality testing performance and results. Throughout the foreseeable future, the tighter operating environment will test indenture covenants and we could expect higher downgrade activity within the healthcare space, yet we do not expect wholesale credit erosion across the sector. CARES will provide about $180 billion in overall health-related spending, approximately $130 billion of which is earmarked for the nation’s hospital system and most of this will flow through a Public Health and Social Services Emergency Fund.

Generally, we do expect the airport sector to demonstrate resiliency as most have the financial wherewithal to confront sustained operational challenges, yet a prolonged displacement in volume trends and overall consumer sentiment could have adverse credit consequences for some. We view the $10 billion in relief as providing meaningful stability to airport operations. Airports will have wide latitude for the use of most of this relief, with debt service being a possible recipient. Overall, the airport sector enters the cryogenically frozen economy from a position of strength given important credit attributes and the funding amount provided by CARES should have visibly supportive benefits to the sector. Nevertheless, certain airports may experience operational stress given steep declines in demand and airline capacity cuts translate into a sharp drop in enplanement activity.

Significant declines in ridership and swelling expenditure requirements with outsized sanitation and disinfecting needs during the economic suspension has rendered mass transit one of the hardest hit sectors of public finance. Headlines will intensify as these types of issuers will seek out greater state and federal assistance and more creative funding mechanisms.

State and local governments are experiencing significant declines in various tax receipts, including income (corporate and personal), capital gains, gas, and sales tax collections, which pressure budgets and make it more difficult to forecast revenues. We further note that tax payment delays will likely add further strain on already challenged budgets. In our view, states overall are in a good place to contend with the economic shutdown given improved budgetary practices and a sizeable build of reserves. For certain less flexible local governments, critical decisions over meeting payroll and essential service needs may come at the expense of pension payments and other obligations as revenue constraints and heightened health care costs become the norm for now.

Immediate revenue and expenditure dislocation is being felt across a wide range of colleges and universities and we are concerned over balance sheet erosion. We have to expect that enrollment and student retention challenges will be part of next year’s narrative as we are not sure how the demand profile across the system will change, thus creating budgetary headwinds. The economic shutdown brought on by the coronavirus outbreak will create clearer distinctions among the sector, particularly in terms of how each institution addresses their respective revenue shortfall and which ones possess deeper reserves and stronger cash-flows.

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