Bonds

Improved finances brought Los Angeles Unified School District upgrades from two ratings agencies as it heads to market April 24 with a $2.98 billion Build America Bonds redemption and general obligation bond refunding.

The upgrades affect roughly $11 billion in outstanding GOULT bonds and $472 million in outstanding COPs.

The school district is the third large issuer to redeem BABs using an extraordinary redemption provision despite the threat of an investor lawsuit. Both the University of California Regents and the state of Washington have also refunded BABs.

Moody’s Ratings cited governance as a strength in its upgrade. Alberto Carvalho has been superintendent since February 2022.

Bloomberg News

BofA Securities, Jefferies and RBC Capital Markets will lead a 13-bank syndicate in pricing the bonds.

Proceeds will be used to refund all or a portion of the district’s Build America Bonds — to reduce risk from future sequestration of federal subsidies — and three series of 2014 GO refunding bonds for savings, with no extension of maturity.

Moody’s Ratings and Fitch Ratings upgraded the school district’s bonds, while Kroll Bond Rating Agency affirmed its AAA rating. Moody’s also revised its outlook to stable from positive. KBRA and Fitch affirmed a stable outlook.

“The ratings were upgraded because of the district’s consistent financial performance driven by conservative budgeting practices, adopted policies and multiyear planning that will support satisfactory finances as the district spends down its final pandemic-related grants and adjusts to slowed state aid growth,” Moody’s analysts Helen Cregger and Eric Hoffmann said in a report. “While enrollment declines will remain a challenge, the district’s ongoing work to align operations and staffing levels with reduced revenue will support stable operations.”

Moody’s upgraded the school district’s GOULT bond rating to Aa2 from Aa3 and assigned a Aa2 to the bonds pricing the week of April 22. It also upgraded the issuer rating to Aa3 from A1, and the ratings on its certificates of participation to A1 from A2.

Moody’s had revised its outlook to positive from stable in November 2022, citing the strength of the school district’s plans to implement its 2022-26 strategic plan.

Fitch assigned a AAA rating to the bonds in the upcoming deal and upgraded the district’s issuer default rating to AA-minus from A and its outstanding COP series 2023A to A-plus from A-minus.

Fitch analysts said the upgrade of the district’s IDR reflects implementation of the rating agency’s new U.S. Public Finance Local Government Rating Criteria. It cited the school district’s relatively weak long-term liability composite and strong financial resilience for the AA-minus IDR rating. The school district has moderate long-term liability associated with direct debt and adjusted net pension liabilities as a percentage of residents’ personal income and a high level of fixed carrying costs as a percentage of governmental expenditures, according to Fitch.

Moody’s cited the district’s improved general fund balance for the upgrade, saying it will likely remain above 35% through fiscal 2026, even as the district reduces spending to accommodate future reductions in state funding.

“Governance is a key driver of the rating,” Moody’s analysts said, citing the district’s multiyear planning, wage agreements, cost cutting and efforts to strengthen attendance and maximize the operating efficiency of school campuses.

The rating “also recognizes the district’s progress in implementing a four-year strategic plan to align facility operations and staffing levels with the end of one-time grants related to the pandemic and slowed state aid growth,” Moody’s analysts said.

The district is the second largest district in the country, with projected enrollment for fiscal 2025 of 403,453, a 2% decline from the prior year, Moody’s said.

Moody’s Aa2 rating on the district’s GOULT bonds, which is one notch higher than the district’s issuer rating, reflects California school district GO bond security features that include the physical separation through a “lockbox” for pledged property tax collections and a security interest created by statute, Moody’s said. The lower A1 rating on the COPs reflects abatement risk and essential leased assets consisting of several schools, Moody’s analysts said.

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