While municipal bonds are considered less risky than many other investments, risks still exist. Some of the risks to an individual municipal bond can be uncovered by going beyond the initial credit agency rating, such as a municipality that receives most of its income from only a few taxpayers. Other risks to an individual issuer cannot be easily detected or forecast prior to purchase such as that of a natural disaster. The recent flooding in Houston and surrounding areas from Tropical Storm Imelda reminds us of such a risk. While many Wealth Management firms buy municipal bonds and do not revisit them until they mature, Broadway Bank Wealth Management continues to monitor and manage its holdings, as long as they are owned.
A state of disaster was declared for twelve counties to which our clients have exposure. Of these, Jefferson County (which includes the cities of Beaumont, Nederland, and Port Arthur) received the greatest amount of rainfall. As part of our monitoring process, we assessed the impact of Imelda for each bond issuer in the county. While we monitor effects from natural disasters and other events that impact the health our holdings, our portfolio managers also develop their municipal bond portfolios with risk management in mind. First, we diversify municipal bond portfolios in a myriad of ways, including by geography, revenue generation, and tax base. Second, we invest in shorter-term bonds, which allows these counties and cities to draw on reserves to stay current on their earlier maturities before payment problems occur. Third, we favor bonds with credit enhancements whenever possible. This includes backing by the Texas Permanent School Fund (PSF), use of U.S. Treasury securities as collateral, and municipal bond insurance. In the case of insured bonds, we always research the bond on its own merits, accepting the insurance as a secondary line of defense against default.
While risks still exist in municipal bond portfolios, Broadway Bank’s portfolio management team seeks to mitigate these risks through its municipal bond vetting and monitoring process. After reviewing Wealth Management clients’ holdings of municipal bonds in the declared states of disaster, we have no current concerns about repayment due to Tropical Storm Imelda.
As always, please feel free to with any questions you may have.