PIMCO Warns LA City Utility Faces Steep Liabilities After Fires

The recent wildfires that have devastated Los Angeles have left the city's Department of Water and Power (LADWP) facing potential steep liabilities, according to Pacific Investment Management Company (PIMCO). The utility, which serves over 4 million customers, may be held responsible for its alleged failure to properly manage water supplies critical to fighting the deadly Palisades Fire.

In a statement released on Wednesday, PIMCO warned that LADWP's credit profile has deteriorated following the lawsuit, which claims the utility failed to adequately manage water supplies crucial for firefighting efforts. Ratings agency S&P Global Ratings has already downgraded LADWP's water and power bonds by two notches, citing potential vulnerability to liability claims.

While the risk of missed debt payments is low due to LADWP's solid financials, investors may require higher returns to hold the utility's bonds, taking into account the potential financial impact of litigations over the next few years. This could lead to increased borrowing costs for LADWP, potentially straining its financial stability.

Moreover, if LADWP is found to have equipment that sparked the Palisades blaze, it could face more serious risks by making it more vulnerable to costly lawsuits. Moody's, another credit rating agency, has stated that while the damage to LADWP's power system's assets and the associated repair or rebuilding costs are expected to be manageable, potential liability claims could have a more significant impact on the utility's financial health.

Despite the potential liabilities facing LADWP, the overall financial health of the city and county of Los Angeles is strong. PIMCO highlighted the municipality's broad tax base, which will continue to generate sufficient revenues to meet debt obligations. Federal Emergency Management Agency (FEMA) funding for temporary assistance will also be key to ensuring continued debt payments.

However, the potential liability for LADWP could impact investor confidence in the utility's bonds, potentially leading to higher returns required by investors. This could, in turn, affect municipal credit ratings and bondholder payments.

In conclusion, while the potential liabilities for LADWP are a concern, the overall financial health of the city and county of Los Angeles is strong. This should ensure that bondholder payments remain unaffected, and municipal credit ratings are likely to be maintained. However, the potential liability for LADWP could impact investor confidence in the utility's bonds, potentially leading to higher returns required by investors.