KBRA Places Several Los Angeles Area Ratings on Watch Downgrade

KBRA places the following ratings on Watch Downgrade reflecting potential negative credit impacts related to the January, 2025 Los Angeles area wildfires.

 Ratings Placed on Watch Downgrade

Given this rapidly evolving, highly complex and unprecedented natural catastrophe, KBRA believes its is premature to change any ratings until such time as we have sufficient visibility into the ramifications for affected issuers to make an informed credit assessment.

In the case of both Power System Revenue Bonds and Water System Revenue Bonds of the Department of Water and Power of the City of Los Angeles ("the Department", or "LADWP"), the Watch Downgrade status reflects KBRA's view that while none of LADWP's infrastructure, equipment or processes have, to date, been implicated as a cause of or contributor to the wildfires, the Department faces potential inverse condemnation risk and related legal and financial exposure, regardless of negligence, if its Power System or Water System infrastructure is found to have contributed to wildfire-related property damage. With several fires still burning, the magnitude of loss of property, environmental damage, and interruption to business within the Department's service area continues to evolve. However, we consider it possible that the costs of a potential financial liability claim could exceed the Department's available commercial and self insurance reserves. The Watch Downgrade status further reflects the potential for wildfire impacts to increase LADWP's operating expenditures and reduce system revenues in the short-term. Costs of infrastructure remediation and asset hardening to protect against future wildfires, to the extent not supported by federal or state funding, could pressure rate affordability, contribute to already high levels of leverage, and disrupt the Department's capital plan and ambitious Power System long range strategic plan, much of which relates to federal, state and local mandates for energy efficiency, GHG emissions and renewable energy standards.

The Watch Downgrade status on the City of Los Angeles General Obligation bond rating reflects KBRA's view that although there has been no finding or implication, to date, that City owned infrastructure or actions are responsible for the wildfires, the City, acting through LADWP, may have potential exposure to wildfire liability claims. Additionally, in our view, the ongoing wildfires have the potential to strain the City's financial position by necessitating an increase in unbudgeted expenditures and reducing available liquidity. A decline in the assessed value of impacted properties and/or a delay in property tax collections could also reduce General Fund operating revenues, particularly over the short-term. The impact to the City's other economically sensitive revenues will be a function of the degree of economic disruption ultimately engendered by the fires, which remains unknown.

The Watch Downgrade status on the various series of KBRA-rated Lease Revenue Bonds issued by the Municipal Improvement Corporation of the City of Los Angeles (MICLA) derives from the action taken on the City's General Obligation rating.

Ratings Not Placed on Watch Downgrade

KBRA does not take any actions with respect to the ratings of the following Los Angeles area credits, for which we consider there to be no immediate or potentially imminent wildfire impacts. KBRA will continue to closely monitor the situation.

City of Los Angeles Water and Wastewater System Senior Lien Revenue Bonds - long-term rating AA+/Stable

City of Los Angeles Water and Wastewater System Subordinate Lien Revenue Bonds - long-term rating AA/Stable

City of Los Angeles Solid Waste Resources Revenue Bonds - long-term rating AA/Stable

Los Angeles Unified School District - long-term rating AAA/Stable

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