Municipal Bond Forum
Los Angeles GO debt rated higher than the states
Q
I’ve read that Los Angeles will file for bankruptcy, but I can’t find anything to confirm this. I do know that the city’s deficit is in the hundreds of millions. So far, my bonds tied to Los Angeles are holding up in value. Most are revenue bonds. What would happen to the revenue bonds, such as the LA DWP, should the L.A. general fund become insolvent?
A
James A. Klotz responds:
If Los Angeles is teetering on the brink of bankruptcy, it is news to us and to the major rating agencies.
Actually, the city’s General Obligation debt is rated higher than the state of California’s. Moody’s rates Los Angeles “AA3,” while Standard & Poor’s assigns it a rating of “AA-” with a stable outlook. These ratings were reviewed in March 2012.
These ratings primarily reflect the city’s extremely large and relatively stable property base, which experienced an uptick in fiscal 2012. L.A. has only had a moderate direct-debt burden comprised mostly of fixed-rate, rapidly retired debt. Its local economy is sluggish but slowly expanding.
The L.A. Department of Water and Power is not related to the General Obligation debt of the city, but is rated “AA” on its own merit. These bonds are payable from the retail water system’s net revenues derived from more than 660,000 customers. It is the state’s largest retail water supplier and enjoys a broad and mature revenue stream.
In summary, we see no need for concern regarding your investments in these issues.
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