Drought-Hit California Gets $165 Million Water Debt: Muni Deals

Feb 24, 2014 2:17 am ET

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Feb. 24 (Bloomberg) -- The department that manages most of the water supply of drought-plagued California is selling $165.3 million of bonds to expand a reservoir and build pipelines in an area where citrus groves have yielded to homes.

About 90 percent of the most-populous state is gripped by a severe drought that threatens agriculture and supplies to businesses and some of California’s 38 million residents. Yet the phenomenon has little effect on the creditworthiness of the state’s Department of Water Resources, Moody’s Investors Service said in a Feb. 14 report. Local water agencies must pay the state even when it doesn’t provide them supplies, Moody’s said in assigning the debt an Aa1 rating, its second-highest.

Proceeds from the bonds will more than double the size of a reservoir about 70 miles (113 kilometers) east of Los Angeles and expand pipelines linking to suburbs in San Bernardino County, Ted Thomas, a water agency spokesman, said by e-mail. He said drought shouldn’t curb investor interest in the bonds, noting that the agency has never defaulted.

The agency manages resources such as aqueducts that transfer Sierra Nevada snowmelt and rainfall from the Sacramento and San Joaquin River deltas to Southern California. Twenty-nine local agencies purchase water from the state. On Jan. 31, the department said it wouldn’t transfer water to local agencies because of drought.

“Drought is a difficult risk for rating agencies to incorporate into ratings due to a delayed effect,” Michael E. Johnson, managing director in Solana Beach, California, at Gurtin Fixed Income Management LLC, said by e-mail. “You may not know quite how distressed an agency is until it is about to go over the cliff.”

The department sold about $120 million of debt in May with the same ratings. Bonds maturing in December 2033 traded Feb. 21 with an average yield of 3.52 percent, the lowest since June and about 1.02 percentage points above benchmark munis, data compiled by Bloomberg show.

--Editors: Mark Tannenbaum, Jeffrey Taylor