Los Angeles social bonds score AAA rating ahead of competitive sale

Los Angeles is the latest issuer to come to market riding a Fitch Ratings upgrade from its revised local government criteria as the city prepares to sell social bonds competitively to support its efforts to eradicate homelessness.

Fitch upgraded the city’s issuer default rating to AA-plus from AA and assigned a AAA rating to the city’s planned June 24 sale of $150 million in general obligation bonds by competitive bid. The outlook is stable.

The proceeds will be used to finance the construction of permanent supportive housing for unhoused people. The bonds will be repaid using funding from the Proposition HHH bond measure, which was approved by voters in 2016 to reduce homelessness.

Los Angeles Mayor Karen Bass has been holding press conferences throughout the city demonstrating the effectiveness of her Inside Safe program, which taps Proposition HHH funding to place homeless people in housing and clear encampments.

“We continue taking steps to save lives and provide supportive services to those Angelenos in need across the city,” Bass said Wednesday.

The city’s general obligation bonds have been rated AAA since 2021, “but we are pleased with Fitch’s decision to upgrade the city’s issuer default rating, which better reflects the city’s diverse economy, strong revenue drivers, and conservative management practices,” said Ha To, the city’s debt manager. “We hope the upgrade will provide positive momentum for next week.”

In addition to selling the GOs competitively on Monday, the city plans to price $1.5 billion of tax and revenue anticipation notes on Tuesday and Wednesday in the negotiated market, To said.

The Fitch upgrade came as part of the change the rating agency made to its U.S. public finance local government rating criteria in September. The new criteria are expected to impact roughly 35% of Fitch’s local government ratings and will mostly result in one-notch upgrades or downgrades, analysts said during an October webinar.

The city’s “AAA financial resilience assessment and moderate long-term liability burden” were balanced against the city’s weak demographic and economic trend metrics, which include flat population growth, elevated unemployment and below-average median household growth, Fitch analysts wrote.

The social bonds received a AAA rating, one notch above the city’s AA-plus issuer default rating, “based on the application of California’s statutory lien,” Fitch analyst wrote.

Fitch has been assigning AAA ratings to school district GOs based on the analysis of the statutory lien since 2015.

“The California legislature passed and the governor signed into law Senate Bill 222 on July 13, 2015, amendments to section 53515 of the California Government Code and section 15251 of the Education Code to provide that a statutory lien automatically arises on all pledged revenues securing GO bonds issued by local agencies or school districts,” Fitch analysts wrote.

Fitch analysts said they “believe the statute provides bondholders with a substantial preferential right in a bankruptcy proceeding, warranting a GO bond rating up to two notches higher than the entity’s IDR.”

The size of the city’s economy was a factor in the upgrade as Fitch’s new criteria recognized “the city’s role as the center of a diverse and growing metropolitan statistical area (MSA),” wrote Fitch analysts Karen Ribble, a senior director and lead analyst, Divya Bali, a director, and Jose Acosta, a senior director.

The Los Angeles-Long Beach-Anaheim metropolitan statistical area has the second largest gross domestic product in the U.S., generating 5.4% of the country’s GDP, according to the report.

Fitch also upgraded $735.5 million in outstanding Municipal Improvement Corporation of Los Angeles (MICLA) lease revenue bonds to AA from AA-minus. It affirmed the AA rating on $201 million in solid waste resource revenue bonds and a AAA rating on $641.6 million in outstanding GOs. The city has $1 billion in outstanding GOs.

Moody’s Ratings assigned a Aa2 rating to the social bonds ahead of the deal and affirmed its Aa2 rating with a stable outlook. The city holds a AA rating with a stable outlook from S&P Global Ratings. The S&P rating hasn’t been updated ahead of the sale.