West's record wildfires haven't changed bond ratings or pricing

California and Oregon are experiencing yet another record-setting year of wildfires.

The still-raging Park Fire in northern California, the largest of 12 active fires, has consumed more than 426,000 acres, and is the state’s fourth-largest fire in the past two decades. More than two weeks after an arsonist started the conflagration, it is only 34% contained.

Oregon has lost 1.38 million acres to wildfires this year, and is on track to surpass 2012, its worst fire year in modern history, according to a report in the Oregon Capital Chronicle.

California Gov. Gavin Newsom on July 30 surveyed the Borel Fire, which has burned more than 59,000 acres in Kern County and Sequoia National Park.

California governor’s office

Fires are burning year after year, and so far, municipal issuers are largely not being penalized by either investors or the rating agencies, said Tom Doe, president of Municipal Market Analytics.

In a LinkedIn post on Sunday, Doe urged issuers with known climate risks to raise capital now, while investors and rating agencies are not emphasizing climate and knock-on risks as critical variables that will ultimately result in higher yields.

“If the investors aren’t penalizing an issuer that has climate risk with higher yields and the rating agencies aren’t taking actions to hurt ratings, they ought to be tapping the market now to protect against climate risks,” Doe said in an interview.

The view of rating agencies has been that local government ratings were protected, even in the wake of devastating wildfires, because the Federal Emergency Management Agency would provide funding to reimburse states for the costs to fight fires and rebuild infrastructure. And both Oregon and California lawmakers would approve funding to defray the remaining expenses not covered by FEMA, as they had historically.

Amid record federal deficits, the level of FEMA funding was a question mark during last year’s budget, and federal relief is no longer a given.

“FEMA money was never intended to make communities whole,” said Lori Trevino, a Moody’s Ratings credit analyst and assistant vice president. “It was just to cover clean-up efforts, and to some extent, rebuilding efforts to make things minimally safe.”

Even the state paying the local match to FEMA doesn’t make cities whole, Trevino said.

The state paid the local share for Paradise, a California city that was destroyed by fire six years ago, but what really helped the city rebuild is the money it received in a settlement from the PG&E bankruptcy, she said. The investor-owned electric utility was found to be responsible for the fire and paid tens of billions in settlements to individuals who lost their homes or businesses in the 2018 Camp Fire.

“We do definitely factor FEMA disaster aid to agencies into our ratings,” said Denise Rappmund, a Moody’s senior credit analyst and vice president. “If that were to be significantly reduced, it would be a credit negative. To Lori’s point, we don’t expect FEMA to make them whole, but it is significant and important.”

California has received fire management assistance grants from FEMA to aid in fire suppression efforts for several of the fires, according to California Gov. Gavin Newsom’s office.

Fitch Ratings is not changing the way it evaluates the risk from wildfires yet, said Karen Ribble, a senior director. The rating agency has spent the past year implementing an expansive change to the way it rates local governments.

“It’s true there is some discussion about FEMA and should they really reimburse everything, the way they have been doing forever,” Ribble said. “It seems preliminary. Until there is some obvious shift, or some legislation passed, I don’t see us changing our view. We are mindful of what has been occurring and want to make sure our view on FEMA continues to be true as far as it affects credit.”

The way wildfires affect most local government ratings is through assessed valuation and economic trends, Trevino said.

Other than California’s Camp Fire that destroyed the town of Paradise, Trevino said, “we haven’t seen wildfires have a devastating effect on the tax base.”

Even the 2017 Tubbs Fire that leveled an entire neighborhood in Santa Rosa, California, a city of 186,000 55 miles north of San Francisco, has rebounded, according to Moody’s evaluation, because people are rebuilding houses and houses are selling for higher amounts, Trevino said.

“We aren’t seeing a change in that yet,” Trevino said of the risk that people won’t rebuild, but added it’s certainly something the rating agency would consider.

In his LinkedIn posts, Doe noted that seven issuers in Texas, Phoenix, Florida and Louisiana with climate sensitivity issues sold bonds with an average yield of 3.14 at the 10-year.

The deals, coming ahead of a $1.88 billion Louisiana P3 financing in a high-risk climate area, “did not reflect significant pricing or ratings penalties in July 2024,” Doe wrote.

In an interview, he said, he would expect that California and Oregon credits would face the same treatment from investors and rating agencies despite the ongoing fire danger.

“Climate risk has not been priced in, and I don’t know what is going to tip it,” Doe said. “The rating agencies are using old metrics and short-term time horizons to maintain rating stability amid constant climate adversity.”

And, “as long as the money is there, the bonds are selling off whatever structure,” Doe said.

The rating agencies “feel justified in maintaining the ratings without looking at risk over the life of the bonds,” said Doe, who also argues they are not giving enough weight to the soaring costs of electricity and rising property insurance costs.

California has been grappling with property insurers leaving the state because of the fire perils. The challenges with insurance present another threat to a rating agency assumption: that homeowners will rebuild, restoring the assessed property value base that cities and counties depend on for income.

“If you have a mortgage you are required to have homeowners insurance,” said Sara Hibler, associate managing director in Moody’s property and casualty division. “It might be expensive,” she said, and homeowners might be forced to turn to Fair Access to Insurance Requirements plans. FAIR plans are state-mandated property insurance plans that provide coverage to individuals and businesses who are unable to obtain insurance in the regular market.

If a homeowner doesn’t purchase insurance through a FAIR plan, then the mortgage servicer or the lender would place insurance on it, Hibler said.

“If you don’t have a mortgage, the homeowner has a decision to make about where they will get insurance,” she said.

“A lot of national insurers have been pulling out of California and are planning on re-entering when they are able to charge different rates,” Trevino said.

State Farm stopped accepting new applications for policies on California properties in May 2023. Allstate had announced in November 2022 it would pause new homeowners, condo and commercial policies in California to protect current customers, The Associated Press reported in 2023. It cited inflation and a challenging reinsurance market and rapidly growing catastrophe exposure.