Municipal Bond Funds Hold Up In Katrina's Wake

Impact of the disaster on munis in the damaged areas remains uncertain

Hurricane Katrina ravaged parts of the Gulf of Mexico, but mutual funds that invest in bonds issued by states and local governments in the region have held up fairly well so far.

Six funds that buy Louisiana bonds suffered losses ranging from 0.4% to 1.1% between August 31, two days after the storm hit, and this past Monday. By comparison, the average high quality municipal bond fund was off 0.2%, and the average single-state municipal bond fund dropped 0.3% during that period.

Despite those figures, the impact of the disaster on municipal bonds in the damaged areas still remains uncertain.

Standard & Poor's said last Friday that it may lower its ratings on about $9.4 billion in Louisiana and Mississippi debt because of destruction from the hurricane.

How many of those bonds, if any, will not be paid off "remains to be seen," said Alexander Fraser, a Standard & Poor's director and municipal bond analyst.

Only a handful of the bonds that may be downgraded by Standard & Poor's had payments due on September 1, and all those were made, as far as he knows, Fraser said.

Fraser noted that governments in the region face the loss of revenue from sales and property taxes and other sources because of Katrina. "The big question" is how quickly that money will be restored before reserves for debt service run out, he said.

Robert MacIntosh, who runs the $36-million Eaton Vance Louisiana Municipals Fund (ETLAX), said he thinks some Louisiana municipalities may have difficulty meeting their obligations, but he expects the state and Washington to take action to prevent defaults.

Similar sentiments were expressed by Thomas Moles, a managing director with investment firm J&W Seligman Inc. who oversees its municipal bond funds. These include the $40-million Seligman Municipal Srs:Louisiana/A (SLOTX).

MacIntosh said he has been unable to gauge the effect of the hurricane on debt issued by states and local governments in the region because "there hasn't been a lot of trading" in these bonds of late. Past disasters have lead to buying opportunities in these securities, but "we haven't seen that happen this time around," he said, possibly because investors realize that "there's no point in panic selling."

Fund managers said they have not made any major changes in their funds' portfolios, and have not seen any redemptions by shareholders as a result of the hurricane.

Fraser said he could not tell if large investors in municipal bonds, like property and casualty insurers, would sell their holdings to pay for hurricane-related claims. But fund managers said they viewed selling as unlikely because insurers have adequate reserves to fund claims.

David Kerwin, sector leader for the municipal bond group of the RiverSource Investments unit of Ameriprise Financial, said property and casualty insurers have been "voracious buyers" of municipal bonds over the last couple of years. Things he's read about the municipal market recently suggest insurers' appetite for the securities may be reduced, "but not to the point where they'll become net sellers," said Kerwin, whose company was part of American Express Co. (AXP) until a spinoff in August.

Fund managers said they expect states and municipalities damaged by Katrina to issue fewer bonds over the next few months while they put new projects on hold. But they see issuance picking up in early 2006 or later in the year as government entities seek funding to replace buildings and infrastructures that were washed away by the hurricane.

Louisiana Municipal Bond Funds

Fund

Total Return (%) Aug. 31, 2005 -- Sept. 12, 2005

Total Return (%) One Year (Through Aug. 31)

Eaton Vance Louisiana Municipals/A (ETLAX)

-0.5

+6.0

Franklin Tax Free Tr:Louisiana Tx Fr Inc/A (FKLAX)

-0.9

+5.3

Hibernia:Louisiana Municipal Income Fund/B (HLAMX)

-0.4

+2.6

JPMorgan Louisiana Municipal Bond/A (PGLAX)

-0.5

+2.4

Nuveen Louisiana Municipal Bond Fund/A (FTLAX)

-1.1

+5.3

Seligman Municipal Srs:Louisiana/A (SLOTX)

-0.5

+3.7

Source: Standard & Poor's. Total returns are in U.S. dollars and include reinvested dividends. Preliminary data as of 9/12/05.

InvestmentAdvisor.com has more mutual fund news from Standard & Poor's available here.
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