California’s drought is starting to spread to the market for bonds issued by water utilities, long considered one of the safest types of debt sold by state and local governments. Some investors are steering clear of the bonds from hard-hit areas of the U.S. west, amid concerns that restrictions on water use will drive down water-authority revenue. Some authorities may have a tough time raising rates to offset that lost income.
If shortages persist, credit ratings may weaken and prices for outstanding bonds fall, according to analysts and rating firms.
California water and sewer bonds lost value in April for the second month in three, falling 0.61% after Gov. Jerry Brown imposed mandatory water restrictions. All California municipal bonds posted a 0.55% decline for the month, counting price moves and interest payments, according to Barclays PLC.
California is in its fourth year of drought, one of the worst on record for the nation’s most populous state. It is costing billions of dollars in losses in its agricultural sector and prompting the first-ever mandatory statewide cutbacks in water use.
It is also a rare fissure in one of the most-secure and widely traded sectors of the $3.7 trillion municipal-bond market. During last year’s rally in bonds, water and sewer debt nationwide outperformed the market, rising 9.7% compared with 9% for tax-exempt bonds overall, according to Barclays. California water and sewer agencies have issued about $28.8 billion in bonds since 2010, according to Thomson Reuters.
Water-utility bonds seldom default because they’re typically backed by residents’ payments on an essential service. And so far the drought hasn’t kept water authorities from tapping the debt market. [...]
Lots more in the report but I'll skip to this passage:
Maintaining investor demand will be important in California, where officials are accelerating parts of a voter-approved plan to sell more than $7 billion in general obligation bonds to pay for new water projects. That plan includes grants to local authorities, who may sell their own bonds.
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