Goldman Sachs Prices LADWP’s $400M Revenue Bond Sale as Market Weighs Potential Lawsuits Impact

Goldman Sachs priced the Department of Water and Power of the City of Los Angeles, or LADWP, $400 million Series 2026A power system revenue bond issuance, according to a final pricing deal sheet seen by Octus. Final pricing shows maturities from 2032 to 2056 and coupons from 5.00% to 5.25% for the longer maturities, and spreads indicate the market is pricing in the potential impact of lawsuits.

The bonds have an optional call at par in January 2036. Delivery is firm for April 21. Final pricing for all tranches of the offering is shown below:
 

The deal comes after February’s California Superior Court decision allowed legal claims for damages related to last year’s Palisades Fire filed by more than 10,000 plaintiffs against the state of California, the city of Los Angeles and the LADWP to proceed.

Final pricing appears to indicate that the market is digesting the litigation risk and factoring it into its analysis, but the worst-case scenario does not seem to be priced in, said a person familiar with the deal.

The LADWP bonds are rated Aa3 by Moody’s Ratings, AA- by Fitch Ratings and AA by KBRA, except for the bonds due July 2037, which are rated AA by S&P Global Ratings because of an insurance policy from Build America Mutual. Bond proceeds will pay capital improvement costs of the power system and issuance costs for the Series 2026A bonds.

Patrick Strollo, head of credit at Bel Air Investment Advisors, a Los Angeles-based firm that sold all of its position in the utility after the Palisades Fire 1.5 years ago, said in an interview with Octus that the pricing for the LADWP deal was too low given significant litigation risk surrounding inverse condemnation claims.

The potential liability from the lawsuit, estimated by the market at up to $10 billion, exceeds LADWP’s current net debt, making the compensation spread inadequate for Bel Air to come back to the department’s credits, according to Strollo. Although spreads have tightened since the fires, the uncertainty surrounding the litigation outcome necessitates a higher spread to justify the risk for the firm, Strollo added.

“LADWP has cheapened up significantly,” said Strollo. “Historically, if you look back at spreads prior to the fires, in December 2024, you could see spreads that were actually trading through the AAA scale, and that makes sense, it’s the largest utility in the country,” according to Strollo, who noted that California paper always demands a premium relative to the rest of the United States.

“We have seen spreads blown out where they were trading pre-fire and they even come in from the initial fire reactions. But for us, we just feel like the compensation just isn’t there quite yet because of the uncertainty surrounding the litigation.”

Strollo said that LADWP is trading near 60 bps spread over AAA, tightened by about 20 bps. “I think we could be intrigued if we kind of breached those levels or got back to the post-wildfires [level].”