Press Release|Public Finance
KBRA Affirms Ratings for the City of Los Angeles, CA Wastewater System Senior Lien and Subordinate Lien Revenue Bonds; Outlooks are Stable
10 Feb 2025 | New York
KBRA affirms the long-term rating for the City of Los Angeles, CA Wastewater System Senior Lien Revenue Bonds at AA+, and affirms the long-term rating for the System's Subordinate Lien Revenue Bonds at AA. The Outlook for both liens is Stable.
Key Credit Considerations
The rating was affirmed because of the following key credit considerations:
Credit Positives
- A recently approved five-year rate action, effective October 2024, if implemented as planned, should enable the continued maintenance of solid liquidity and DSC.
- Strong legal provisions, upon enactment of planned amendments and revisions to the Senior and Subordinate General Resolutions, will continue to include a 1.25x rate covenant and ABT under the Senior General Resolution, and a 1.10x rate covenant and ABT for combined Senior/Subordinate Bonds under the Subordinate General Resolution. The City’s DSC targets for Senior Lien and Combined Lien debt are even higher, at 2.45x and 1.45x, respectively.
- Broad, diverse service area economy and largely residential customer base.
Credit Challenges
- The January 2025 Los Angeles area wildfires are expected to result in extensive losses to property, infrastructure, wages, and the area economy that will harm the System’s rate base. KBRA will continue to closely monitor the fallout on SCM Fund financial performance from this evolving and unprecedented natural catastrophe.
- While the approved 5-year rate action was designed to meet the substantive regulatory requirements of Proposition 218 and Articles 13C and D of the California Constitution, the magnitude and frequency of planned rate increases through July 2028 nonetheless have the potential to engender ratepayer pushback, in our view, especially in light of recent wildfires.
- The increased frequency of extreme weather patterns may lead to greater fluctuation in wastewater flows and increased capital investment needs, reinforcing the need for rate setting flexibility.
- Regulatory compliance related to effluent discharge limits may require significant capital expenditures.
Rating Sensitivities
For Upgrade
- Sustained improvement in debt service coverage and liquidity.
For Downgrade
- Material wildfire-related impacts to the operations of the Wastewater System, the financial condition of the SCM Fund, or the adequacy of debt service coverage of Senior and Combined Senior and Subordinate Bonds.
- Limitations on rate-setting flexibility related to political or ratepayer initiatives.
- Declining rate affordability that negatively impacts the System’s ability to address operating, maintenance or capital needs.
To access ratings and relevant documents, click here.