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LA Utility's First Bond Sale Since Wildfires
The Los Angeles Department of Water and Power is returning to the municipal bond market with a $1 billion offering, roughly three months after shelving a sale in the immediate wake of historic wildfires that began burning in Southern California on Jan 7. Belle Haven Investments Partner Director of Research Dora Lee has more on the story. (Source: Bloomberg)
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LA Utility Returns to Muni Market for First Time Since Wildfires
LA Utility Returns to Muni Market for First Time Since Wildfires
The Los Angeles Department of Water and Power is returning to the municipal bond market with a $1 billion offering, roughly three months after shelving a sale in the immediate wake of historic wildfires that began burning in Southern California on Jan 7.
The power system revenue bonds are set to price for retail investors on April 30, a day before institutional buyers. The department will use proceeds from the sale to ramp up its capital investment program and refinance some outstanding debt.
The issue is shaping up to be a major test of how muni investors view climate risk. The utility’s bonds used to trade better than AAA credits, though the wildfires raised the prospect it will be facing higher costs. The utility will likely need to increase infrastructure spending and it could owe billions in damages as the cause of the flames is still unknown. The department can’t rely on the safety net that investor-owned utilities have through California’s wildfire insurance fund, which would mean higher rates for customers and credit strains for bondholders.
“I’m eager to see whether climate risk gets priced in,” said Tom Doe, founder and president of Municipal Market Analytics, an independent research firm. He said that the muni market tends to shake off climate risk, typically considering the likelihood of default instead. “Even with the recent volatility, we’ve had demand for California bonds because there’s such great demand from high net-worth investors.”
A spokesperson for the Los Angeles Department of Water and Power declined to comment on the upcoming bond sale.
Following the wildfires, prices on power system bonds sold by the utility dropped, and their spreads widened, signaling investors were unloading the securities. Spreads have since tightened but the average gap between benchmark securities and LADWP debt due in 2045 is 137 basis points, up from as little as 95 basis points in December. The spread on an LADWP bond due in 2033 widened to an average of 87 basis points on Friday, compared to -18 on Jan. 2.
The fires also exposed vulnerabilities in LADWP infrastructure and opened up the utility to litigation stemming from its response to the disaster. LADWP faces at least a dozen lawsuits filed related to the Palisades Fire. Legal experts are suggesting the municipal utility may be held accountable under a legal argument called inverse condemnation, which could pave the way for property owners to collect damages from the utility for leaving fire crews without enough water.
S&P Global Ratings lowered its rating on municipal bonds sold by LADWP two notches to A from AA- in January, and warned that more downgrades may be ahead once litigation is complete. Fitch Ratings also downgraded LADWP’s water system revenue bonds to AA- from AA, citing increased liability risk tied to wildfires and limited financial headroom to absorb additional costs.
The utility has a bevy of capital needs tied to a 2022 blueprint aimed at transitioning its power portfolio toward renewable energy, strengthening grid resilience, and adapting to climate-related threats.
“There hasn’t been any ‘turning point’ for climate risk in terms of significant price concessions so far,” said Dora Lee, director of research for Belle Haven Investments. “Not just for LADWP but for other climate prone areas as well. You see places devastated by hurricanes repeatedly that come to market with little change if anything.”
Lee says a web of safety nets have supported climate prone credits during recovery, warding off price concessions.
The new bonds are rated Aa2 by Moody’s Ratings and AA- by Fitch, according to bond documents. Both ratings carry negative outlooks, signaling the possibility of future downgrades.
The negative outlook reflects Fitch’s “view that wildfire credit pressures remain, including the potential for a rating downgrade if LADWP equipment is found to have ignited the Palisades wildfire or if LADWP’s protocols are found to have been a contributing factor,” analysts wrote in a April report.
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https://www.bloomberg.com/news/articles/2025-04-29/la-utility-returns-to-muni-market-for-first-time-since-wildfires?sref=dlv6Ue8o
Belle Haven Investments Named PSN Top Guns "Manager of the Decade" FIVE Times
Brightline West's $2.5 billion bond pricing 'too attractive to ignore'
Brightline West's $2.5 billion bond pricing 'too attractive to ignore'
Brightline West, the Las Vegas- Los Angeles bullet train, hit the market Thursday with $2.5 billion of unrated private activity bonds that sported nearly double-digit yields in what's likely to be the largest high-yield municipal bond borrowing of the year.
The deal was structured with a single $2 billion CUSIP, a relatively rare structure in the municipal market that investors said would enhance its liquidity. More than $3.4 billion orders came in for the $2.5 billion deal, with 75 accounts participating, according to two buyside sources.
"To compare this deal with other opportunities in the high-yield market, you're getting more liquid trading bonds, an excellent yield and good sponsorship with a very good economic premise behind it," said Jim Lyman, senior vice president at Belle Haven Investments, which participated in the deal.
All the bonds featured 9.5% coupons, were priced at a discount and are callable at premium, noted a high-yield portfolio manager who asked to remain anonymous. "They made it too attractive to ignore," the manager said, calling the yields and structure "eye-popping."
"It gives you coupon, yield performance, a lien on an exciting project, liquidity, it's lowish on the duration front, and government support and support from the equity sponsor," the manager said. "Those are lot of bells and whistles."
The $2 billion California tranche was bumped four basis points between preliminary and final pricing, according to traders.
DesertXpress Enterprises LLC, which does business as Brightline West and is owned by Fortress Investment Group, aims to own and operate the nation's first privately-owned, all-electric high-speed train. The most recent timeline has it running by December 2028, a date that misses the original target of opening in time for the Los Angeles Olympics.
The $2.5 billion borrowing marks the first step toward full financing of the $12.4 billion train. The team now has 180 days to secure a $6 billion bank facility, which will be senior to the A s and which may include a $1.5 billion tax-exempt tranche, as well as additional equity. If the company fails to secure the additional funds, there will be a mandatory bond redemption at 101, according to an investor presentation accompanying preliminary bond documents.
The sponsor has a total of $4.5 billion of private activity bond allocation, including $2.5 billion that expires at the end of March and $2 billion that will expire at the end of December.
Morgan Stanley, the lead underwriter on all of Brightline West and Brightline Florida financings, was senior manager on a team with eight co-managers. The bank declined comment and Brightline West did not return a request for comment.
In remarkably good timing for the borrowing, the Trump administration singled out the project for praise Thursday as the administration announced it may rescind $4 billion of federal grants for the California high-speed rail line .
"The slow progress by [California High Speed Rail Authority] contrasts with the impressive work of Brightline West to build a high-speed rail system," the U.S. Department of Transportation said in the press release announcing the California probe.
Some investors had been concerned about uncertainties around the Trump administration's approach to federal transportation grants. Brightline West secured a $3 billion federal grant from the iden administration in late 2024 that's the same Federal Railroad Administration grant as the one now the White House may now terminate for California.
The financing team talked with investors and updated bond documents, which note that the Trump administration has already released its first reimbursement of $14 million.
The bond documents mentions under its "risk factors" that the A grant "may not be available to the company and the receipt and use of such grant funds are subject to various conditions and uncertainties."
"Of the $3 billion grant, approximately $2.67 billion has been obligated in the 2022-2025 federal fiscal years and approximately $326 million has been appropriated by Congress under the Infrastructure Investment and Jobs Act as part of an 'advance appropriation' that becomes available for obligation in federal fiscal year 2026," the updated bond documents said.
Lyman said the firm was following the administration's signals closely.
"The California high speed rail train has been mentioned in very negative ways by Trump during this campaign and we were always concerned they would think about all the rail deals in the same way," Lyman said. "As we started to dig deeper, we felt there was clear differentiation between the projects," he said.
"One of the big concerns in the marketplace among all investors was the federal grants being rescinded and there were conversations about the management team about it and we went in depth about how those grants were already funded technically in prior-year Congressional funding agreements, so to rescind it is to break a contract," he added.
Prior to the deal pricing, Jeff Devine, a municipal research analyst at W& Investment Management, said the firm was unlikely to participate.
W& usually participates in "more traditional structures," and some of the deals that have those products aren't "appealing" to the firm, especially with where it is with its separately managed account business, Devine said.
W& took a "hard look" at the Brightline Florida passenger train financing deal from last year and ended up passing on it based on uncertainties around ridership projections and the underlying economics. He added that the backing of Fortress Investment Group was a positive.
Brightline West plans to begin construction early this year. After construction is complete, the company may seek investment-grade ratings for all the outstanding tax-exempt bonds, similar to last year's Brightline Florida deal.
"They want this deal to be the cheapest deal they ever bring to the market for this name," said the high-yield portfolio manager. "Each subsequent deal they'd like to bring at a lower yield and then eventually get a really good refinancing activity and credit rating at the right point in time."
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https://www.bondbuyer.com/news/brightline-west-sells-2-5-billion-of-unrated-bonds-at-prices-too-attractive-to-ignore