Thu Aug 19, 2004
By Linda Prospero

NEW YORK (Reuters) - As Florida attempts to recover from an estimated $15 billion in damages left by Hurricane Charley, tax-exempt debt issuance from the state is likely to increase so Florida can replenish its Hurricane Catastrophe Fund, a municipal bond portfolio manager said.

The fund, established in 1993 and backed by charges to insurers, will need to be built up after the state pays claims from property and casualty insurers, said Stephen Winterstein, a managing director at PNC Advisors Municipal Investment Group in Philadelphia.

The municipal market has speculated that property and casualty insurers will need to liquidate their tax-exempt holdings en masse as homeowners submit their claims, but the state's catastrophe fund should help temper the outflows and any downward pressure on munis, he said.

After property and casualty insurers reach a deductible of $4.5 billion in payments to claimants, they can tap the state for reimbursement of up to $15 billion per hurricane season.

The fund's balance is currently about $6 billion, but it has capacity to issue up to $9 billion of bonds if needed.

"We could see a step-up in issuance later this year or early next year because they may issue tax-exempt muni bonds to replenish the fund," said Winterstein, who manages about $1.6 billion in tax-exempt bonds for high-net-worth individual investors and corporate institutional clients.

The effect would be to cheapen bonds in the Florida tax-exempt market similar to what occurred in California, when the state issued billions of dollars in economic recovery bonds to help balance its budget, according to Winterstein.

Ultimately, however, prices could rise once all the supply is absorbed, Winterstein said. The state's general fund, which is supported by sales tax revenue instead of by income taxes, should be bolstered due to all the reconstruction and rebuilding efforts that will be needed.

MUNIS SHOULD BE "SAFE, NOT SEXY"

Winterstein said that over the last year he has prepared his portfolios for an eventual rise in interest rates, and while investors still want to maximize their income, protecting capital is crucial.

"We start with a fundamental belief that municipal bonds are supposed to be safe, not sexy," he said.

Winterstein says he follows long-term trends, and doesn't believe that a portfolio should be an "interest-rate casino."

He expects the Federal Reserve to hike short-term interest rates another 25 basis points by year end, to 1.75 percent, followed by another 150 basis points in 2005, climbing to the 4 percent range in 2006.

As a result, Winterstein said he has positioned his portfolios to have a lower average maturity when measured against a benchmark index.

His portfolio, while it contains some longer-maturing debt, is now concentrated in the three- to four-year range and the 10- to 12-year range.

"That structure will give us optimal performance on a total-return basis," he said.

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