California wildfires extinguished but investors' concerns remain

The total impact of the January 2025 California wildfires continues to unfold in the US municipal and corporate bond markets. Many are arguing that the disaster is influencing pricing due to the factoring in of climate risk, but not everyone agrees. Operational risk is a significant causal issue in certain corporate debt cases and potentially should be considered too. When investing in municipal and corporate debt that could be subject to climate risk and operational risk, it’s important to work with an evaluated pricing specialist who has deep market experience.  

• The January 2025 California wildfires destroyed both lives and property. Some investors say that climate risk is being factored into municipal bond pricing, while others say it isn’t. 
• For one utility involved in wildfires, operational risk is thought to be as much of a causal issue as climate risk and is impacting debt ratings. LADWP spreads throughout the year has trended downward post fire but has yet to come back to pre-fire levels.
• Pricing municipal and corporate debt that is affected by wildfires can be more complex. It’s essential to work with a provider which has both the data and expertise to deliver the right evaluated pricing. 

The January 2025 California wildfires continue to affect the communities and individuals that endured them. The wildfires are also having an impact on investors, with climate risk now being factored in or at the very least considered. While operational risk is receiving less attention, it continues to have a significant role in the pricing of certain securities. 

The fires burned more than 50,000 acres, claimed at least 29 lives, and destroyed upward of 16,000 structures. Total property and capital losses could range between $76 billion and $131 billion, with insured losses estimated up to $45 billion. One study estimates a 0.48% decline in county-level GDP for 2025, amounting to approximately $4.6 billion.

Unfortunately, these wildfires are part of a larger trend in California. Since 2017, eight of the top ten US wildfire events in terms of highest insured losses occurred in the state. Some in the debt markets are linking this trend to a rise in the impact of climate risk on municipal and corporate bonds.

At the time of the January 2025 wildfires, ratings agencies were quick to act. While the market's reaction as the fires broke out was widening out spreads almost immediately, spreads are slowly tightening in the aftermath. However, one thing is clear they are not back to pre-fire levels. Has this changed how investors evaluate risk and are they factoring in climate.  For example, S&P Global Ratings lowered the Los Angeles Department of Water and Power (LADWP)  power system revenue bonds from AA- to A, and its water system revenue bonds from AA+ to AA- on January14, just a week after the 7 January fires, and published research on the potential impact of wildfires generally on the state of California. 

Figure 1 – Average daily water system spread

Fitch also imposed negative credit watches and downgrades on LADWP, as well as Southern California Public Power Authority and Utah’s Intermountain Power Authority because of their ties to LADWP. In addition, KBRA assigned a long-term rating of AA to the power system revenue bonds, 2025 Series A, and power system revenue bonds, 2025 Series B in April 2025. In May 2025 it also downgraded the water system bonds to AA.

Figure 2 – Average daily power systems spread

Several academic studies say that climate risk – the California wildfires are often the result of unusually dry weather conditions – is becoming a more important factor in the pricing of municipal bonds. For example, one study released in October 2025 found that the municipal bond market began pricing in wildfire risk around the year 2000, and that a “one-standard-deviation rise in wildfire risk leads to a 3.646 basis points increase in a bond's yield spread, increasing financing cost for affected communities.”

However, not everyone agrees that the January 2025 California wildfires should have an influence on pricing over the medium-term, and that California’s economic strength, substantial state and local cash reserves, and access to federal government assistance will blunt the pricing impact. And indeed, credits are recovering some ground. For example, S&P removed LADWP from credit watch in April. As well, on 23 October, Fitch Ratings affirmed the AA- ratings on the LADWP’s $9.82 billion of series of outstanding fixed-rate power system revenue bonds, and shifted the outlook from negative to stable. These changes are enabling the utility to issue more debt. 

While climate risk pricing impacts are receiving considerable attention, operational risk is also a factor in some cases. For example, Southern California Edison was hit with multiple lawsuits in the days after the Eaton Fire in the Pasadena area. At the end of October 2025, it announced that it will be paying out compensation to relatives of those who died, as well as to those whose houses were destroyed or damaged by ash and smoke.

The fires and subsequent actions have had an impact on pricing. For example, So Cal Ed '29s were +71 on 7 January 2025, widened to +110 on 7 February, and continued to widen to roughly +133 on 7 April. Since then, they have gradually tightened to roughly +100 today.  Southern Cal Edison 5.20% '34 were roughly +80 on 7 January, registered roughly +122 on 7 February, were at  +158 7 April, and then gradually tightened to around  +110 in early November. 

Although there has been no official ruling on how the fire started in Eaton, the utility has acknowledged that circumstantial evidence suggests that one of its idled high voltage transmission lines could have started the fire as a result of 100mph winds, according to Reuters. This potentially makes operational risk an equal factor with climate risk in this case.

Official Eaton fire figures show that 19 people died, 9,414 structures were destroyed, and 1,074 structures were damaged, meaning that the total bill for Southern California Edison will be substantial. This situation has hit both the credit rating of Southern California Edison and its parent company, Edison international. Fitch put both on a credit watch in May, and both were downgraded to BBB- by S&P in September.

Previously, Pacific Gas & Electric had filed for bankruptcy in 2019 when it was faced with lawsuits related to a series of wildfires in California, some of which it was found to have contributed to, again showing the importance of operational risk as a causal factor.

The impact of climate risk – and operational risk – on municipal and corporate securities in the US is a story that will continue to unfold – and potentially affect pricing. LSEG Pricing Service provides global coverage on all fixed income securities and over-the-counter derivatives. Our evaluation specialists have both the information and the expertise to support accurate pricing in constantly evolving situations such as these.