Wildfires Won’t Disrupt LA Bond Payments, Says PIMCO
The devastating wildfires that have ravaged the Los Angeles region since January 7 are expected to have a manageable impact on the creditworthiness of municipal bond issuers, according to PIMCO, a leading U.S. bond fund manager.
Strong Financial Foundations
Los Angeles city and county, along with nearby school districts and the state of California, boast robust financial positions, which will enable them to absorb losses without disrupting payments to investors. PIMCO highlights the municipality’s broad tax base, which will continue to generate sufficient revenues to meet debt obligations despite property damage and losses.
FEMA Funding to Provide Crucial Support
Federal Emergency Management Agency (FEMA) funding for temporary assistance will play a vital role in ensuring continued debt payments. PIMCO believes that all affected local governments entered this disaster with healthy liquidity and reserve funds, providing a near-term funding bridge to potential FEMA reimbursement for rebuilding.
LADWP’s Credit Profile Takes a Hit
In contrast, the credit profile of the Los Angeles Department of Water and Power (LADWP) has deteriorated following a lawsuit alleging mismanagement of water supplies critical to fighting the deadly Palisades Fire. Ratings agency S&P Global Ratings downgraded LADWP’s water and power bonds by two notches, citing potential vulnerability to liability claims.
Investors May Demand Higher Returns
While the risk of missed debt payments is low due to solid financials, investors may require higher returns to hold LADWP bonds, taking into account the potential financial impact of litigations over the next few years. PIMCO notes that LADWP’s financial position remains strong, but investors will likely demand a premium to compensate for the increased risk.
A Manageable Crisis
Despite the devastating impact of the wildfires, PIMCO’s baseline expectations suggest that the long-term credit impact will be manageable. The firm, which manages around $2 trillion, believes that the municipality’s strong financial foundations and FEMA funding will ensure that bondholder payments remain unaffected.
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