Los Angeles Water System Bonds Rated AA+ by KBRA with Stable Outlook

KBRA Rates LA Water System Revenue Bonds AA+

In a notable development, Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of AA+ to the Department of Water and Power of the City of Los Angeles for its Water System Revenue Bonds. This rating affirms the ongoing stability of the Water System also reflected in the outstanding parity Water System Revenue Bonds, maintaining a stable outlook for future performance.

Understanding the Rating Drivers

The AA+ rating is indicative of several critical credit considerations that showcase the strength and resilience of Los Angeles's water infrastructure. It is essential to break down these elements to better understand the context behind such a positive rating.

Key Credit Positives

One of the most significant factors contributing to this rating is the established water system serving one of the largest metropolitan areas in the United States. A primarily residential customer base further strengthens the system, as it faces relatively low concentration from commercial and industrial rate payers. This distribution helps ensure stable and consistent revenue generation.

The water system's rate structure is another vital aspect. It incorporates various pass-through adjustments allowing for revenue generation to remain relatively insulated from fluctuations in customer demand. This resilience is particularly important in times of economic uncertainty.

Moreover, the affordability of water rates is a crucial consideration. Even with annual increases since 2019, averaging a compound annual growth rate of 5.9%, the rates remain competitive. The wealthier customer base of the Department of Water and Power supports this finding, suggesting that residents can manage the costs effectively.

Identifying Credit Challenges

Despite the many positive attributes, there are challenges that could impact the water system's credit rating. Notably, even though leverage has shown a decline in recent years, it still remains elevated. The ambitious capital improvement plan for the Water System from 2025 to 2029, which aims to improve local water supply, may lead to a further increase in leverage, requiring close monitoring.

Additionally, the future implementation of water rate increases might be impacted by Proposition 218. This legislation could pose risks if the actual debt service coverage (DSC) dips below the metrics established by the Board and historical averages, potentially leading to negative rating implications.

Rating Sensitivities for Future Changes

To provide investors with clarity, KBRA outlines certain factors that could affect future ratings. For an upgrade, sustained reductions in Water System leverage and an ongoing trend of increasing strength in DSC are desirable encouraging signs. Furthermore, favorable progress noted in addressing the infrastructure needs of the water system could bolster the rating further.

Conversely, several factors could lead to a downgrade. These include a sustained decline in DSC or liquidity, deterioration in the economic conditions of the service area affecting rate-setting flexibility, and the constraints posed by Proposition 218 hampering the ability to implement necessary rate hikes.

Methodological Insights

The evaluation of such ratings is not haphazard; it involves rigorous methodologies ensuring consistent and fair assessments. The Public Finance: U.S. Municipal Retail Utility Revenue Bond Rating Methodology employed by KBRA outlines expectations for municipal bonds, crafting a framework that reflects systemic economic conditions and operational requirements of various entities.

Moreover, incorporating Environmental, Social, and Governance (ESG) considerations in their rating processes, KBRA aims to assess how sustainability factors intertwine with credit risk. This holistic approach underpins their ratings, reflecting a growing trend in the financial industry that acknowledges the significance of non-financial factors.

About KBRA and Its Commitment

Kroll Bond Rating Agency, LLC (KBRA) operates as a full-service credit rating agency. It is officially registered with the U.S. Securities and Exchange Commission, signaling its credibility and adherence to regulatory standards. Additionally, KBRA's influence extends across the Atlantic with UK and EU registrations, ensuring its methodologies meet international expectations.

In an era where transparent and accountable frameworks are increasingly vital, KBRA's dedication to thorough ratings and consistent methodologies positions it favorably within the competitive landscape of credit rating agencies. Their recognition by various financial authorities further attests to their reliability and expertise.

Frequently Asked Questions

What is the significance of the AA+ rating for LA's water system?

The AA+ rating signifies strong creditworthiness and reflects the Department's ability to meet its financial obligations, enhancing investor confidence.

How do water rates impact the credit rating?

Competitive and affordable water rates contribute to stable revenue generation, a key factor in determining the credit rating's strength.

What challenges does the Department of Water and Power face?

The Department faces challenges related to elevated leverage and potential constraints on increasing water rates due to Proposition 218 regulations.

What factors could lead to a rating upgrade?

Sustained leverage reduction and improved debt service coverage trends, along with progress in addressing infrastructure needs, could lead to an upgrade.

What methodologies does KBRA use for ratings?

KBRA employs a rigorous framework involving public finance assessments, taking into account a balance of financial performance and sustainability considerations.

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