Los Angeles wildfires bring wider spreads, downgrade for DWP

The Los Angeles-area wildfires are affecting the ratings and yields on the city’s bonds.

On Tuesday, S&P Global Ratings lowered its long-term and underlying ratings on the Los Angeles Department of Water and Power to A from AA-minus for its power system revenue bonds and to AA-minus from AA-plus on its water revenue bonds. It also placed the ratings on CreditWatch with negative implications.

The DWP on Monday moved to the day-to-day calendar a water revenue bond deal initially set to price Wednesday.

S&P analyst Paul Dyson cited potential liability of the utility’s power system in the fires — though it has not been implicated — and the heightened potential for litigation, liabilities, and future costs surrounding the “adequacy of existing water system assets and emergency preparedness during the ongoing wildfires in the water system downgrade.”

S&P added the utility’s ratings face significant pressure and the credit watch indicates there is a one in two chance they could further downgrade the ratings.

Los Angeles was bracing Tuesday for another set of fast-blowing dry Santa Ana winds like those that escalated the massive Palisade and Eaton fires last week.

Those two fires have damaged or destroyed 12,000 structures, the California Department of Forestry and Fire Protection estimates. At least 24 people have died and more are missing.

Pacific Palisades, devastated by the Palisades fire, is in Los Angeles’ city limits.

“As a result of the devastating fires, since last Friday, we have observed significant volatility in trading of L.A. credits,” J.P. Morgan research analysts Peter DeGroot, Ye Tian and Roisin Gargan wrote in an investor report on Tuesday.

BoA Securities had planned to price $371.05 million of water system revenue bonds for LADWP Wednesday. The bonds received ratings of Aa2 by Moody’s Ratings and AA-plus by Fitch Ratings and Kroll Bond Rating Agency.

An LADWP spokeswoman could not be reached for comment on the changes to the sale schedule.

“The California wildfires are wreaking havoc across multiple fronts,” Kim Olsan, senior fixed income portfolio manager at NewSquare Capital said in a report. “Specific to municipal credits, the Los Angeles Department of Water and Power bonds are undergoing a repricing.”

LADWP power revenue bonds issued at a 5% coupon with a maturity of 2048 in November at 3.69% with a spread of plus 15 basis points on the AAA BVAL were trading in December at a firmer yield of 3.42% and spread of +12/AAA BVAL, according to Olsan. Yesterday’s volume drew sale yields of 4.38% at a spread of +46/AAA BVAL.

LADWP’s water bonds have seen a similar, if smaller, reaction, Olsan said.

A 5% due 2044, call 2034 and issued in May 2024 carried evaluated yields in November and December in the 3.30 range and spread at a nominal +1/AAA BVAL, Olsan said. Monday’s session drew prints at 4.12% and spread of +35/AAA BVAL.

Aside from the LADWP credits, James Pruskowski, chief investment officer of 16Rock Asset Management, said the largest impact seems to be to local and school district credits.

Given the state’s market position, “it is an overhang from the broader market,” Pruskowski said.

“On average, LADWP Power bonds’ yields traded wider by 31 basis points on January 10 and another 49 basis points yesterday, with a cumulative price drop of $3.29,” J.P. Morgan researchers wrote. “LADWP water bonds also had a total yield widening of 44 basis points and price decline of $2.91.”

The yield of Los Angeles USD bonds was cut by a total of 77 basis points, according to the J.P. Morgan report, and the bond price declined by a similar $2.92.

California state general obligation bonds were also trading 15 basis points wider yesterday, according to JP Morgan’s report.

“The municipal market is diverse, with potentially impacted sub-sectors ranging from local governments (cities, counties, school districts), public power utilities, investor-owned utilities with municipal debt, not-for-profit entities, mass transit, and the state itself,” J.P. Morgan said. “Overall, while losses will be significant, we expect federal, state, and insurance will support the rebuilding efforts and, despite the recent spread widening, we expect a full recovery in credits with unlimited taxing power over time.”