The Los Angeles Water and Power Department plans a $380 million bond sale as part of a project that includes replacing aging pipes and hardening the nation’s largest municipal utility against earthquake damage.
The $4 billion improvement plan backed by system revenue includes conservation initiatives such as building new treatment facilities in the drought-prone city of 3.9 million residents, according to a preliminary sale document. It shows that the utility has $3.28 billion in water revenue bonds outstanding.
Pricing is set to occur Nov. 21 for the tax-exempt securities that mature through 2035, according to Phil Leiber, the department’s chief financial officer. The bonds are rated Aa2 by Moody’s Investors Service, its third-highest grade, based on the system’s size, debt-coverage ratio and the strength of the region’s economy, according to an October report.
“They’ve been a frequent issuer and they’ve typically had good reception,” said Dan Solender, who oversees about $16 billion of local debt at Lord Abbett & Co. in Jersey City, New Jersey. “There’s definitely a lot of bonds with more yield out there, but there’s definitely a demand right now for high quality.”
Standard & Poor’s and Fitch Ratings also give the securities their third-highest credit scores, and along with Moody’s they have a stable outlook on the debt.
“There is strong demand among muni investors for revenue bonds of high quality and essential-service utility systems,” Leiber said by e-mail.
U.S. water and sewer debt has performed worse this year, losing 3.1 percent, than the broader municipal market’s 2.4 percent loss. The sale comes as the extra yield investors demand to hold California debt compared with top-rated securities has declined to about 0.37 percentage point on Nov. 15 from 0.63 percentage point in January, Bloomberg valuation indexes show. The yield spread reached a 2013 low of 0.3 percentage point last month, the data show.
The Los Angeles water system joins issuers from Guam to Maryland offering about $6 billion in long-term debt this week, with benchmark yields near a one-month high.
Individuals pulled about $903 million from municipal-bond focused mutual funds in the week through Nov. 13, the most in almost a month, according to Lipper US Fund Flows data.