Fitch Ratings monitoring oil spill’s impact

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Published: June 2,2010

Tags: credit, offshore drilling, oil and gas, oil spill

NEW YORK — Fitch Ratings is closely tracking the aftermath of the massive oil spill related to the April 20, 2010, explosion of the Deepwater Horizon oil rig in the Gulf of Mexico, although analysts believe that speculation on the impact to credit quality for state and local governments in the region would be premature.

Fitch said, “Environmental damage will undoubtedly be severe and long-lasting, but the direction of the oil spill and the magnitude of its effect on a particular state or locality is not yet foreseeable.

“Even less clear are the ways in which this may translate into the fundamental economic and financial factors that affect credit strength. Fitch therefore is not yet prepared to make even broad statements about the relationship of this disaster to the credit quality of individual issuers. Fitch intends to continue to follow events closely and monitor credits in this region with an eye toward both tangible and intangible signs of deterioration that could affect long-term credit quality.

“The states of Alabama, Florida, Louisiana, and Mississippi are in the general area of the oil spill. Fitch will pay particular attention to the physical and economic impact of the oil spill in these states and near-term credit analysis will focus on trends in liquidity and reserve levels, since reimbursement for eligible government-borne costs may not be timely.

“In the longer term, Fitch will become concerned if damage appears to be of a magnitude that fundamentally changes an issuer’s economic prospects. The highest level of concern is likely to be in coastal areas concentrated in tourism or commercial fishing activity whose tax structures and/or bond securities are particularly dependent on such activity. Of equal concern is the effect on property values in affected communities.

“Fitch has observed that in the immediate aftermath of a number of past disasters, such as the 2004 Florida hurricane season which yielded four major storms, the Loma Prieta and Northridge earthquakes in California, and the events of Sept. 11, 2001, a consequent reduction in credit strength seemed inevitable, yet the economic and financial impact of those events proved short-lived and not detrimental to long-term credit quality. Clearly, several local governments have continued to struggle following Hurricane Katrina in 2005, but many others recovered more quickly than had been anticipated immediately after the storm.

“Most of these events resulted in significant damage to real property whose rebuilding generated substantial economic activity and was largely reimbursed by other levels of government. In the current situation, the economic benefits of remediation may not be nearly as large or broad as the economic losses stemming from the destructive event. These examples yield little from which one can draw analytical conclusions as the circumstances and impact of each event is unique, but they may provide some perspective during a time of great uncertainty.”

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