Maui Fire Spells Trouble For Their Municipal Debt Service

The recent fire on the island of Maui, Hawaii was a tragedy of immense and long-lasting proportions. While the human toll was a record high, the financial impact will also be massive, not only to the individual property owners, but also, the local government.

As of their year-end 2021 financial period, the Maui outstanding general obligation debt Was $385 million and business related municipal debt totaled some $60 million. Given the extent of the erosion of property values it is hard to see how they will be able to service this debt load for the next few years. Even if property owners were insured for their losses, the assessed property values will decline to zero for many owners for the foreseeable future.

A $385 million debt load is only about 15% of their assessed property valuation. Hence the county carried credit ratings of Aa1/AA+. These ratings never foresaw that the assessed property values on which the bonds depend could be eviscerated overnight. We expect that Maui will recover over time but its debt burden will require rescheduling. In addition, there will be a significant need for new borrowings for the rebuilding effort which may require tens of millions in new debt.

Tourism, a major source of local business activity, will be severely impacted for several years. This will result in the closing of many businesses which were living hand to mouth. It remains to be seen to what extent the state government will step in with financial assistance. Without such assistance many current local owners may opt to take their insurance recoveries and leave, as happened in Florida after Hurricane Andrew. We can only hope that the recovery is not hampered by governments playing the blame game.

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