high net worth

In January 2025 several wildfires burned in the Los Angeles area resulting in catastrophic destruction and loss of life for which the causes are still under investigation and aftermath yet to be determined. The frequency and scale of wildfires and weather-related incidents have materially increased over the last decade, and continues to do so, thus increasing the risks and potential liabilities for utilities requiring an augmented approach to assessing credit risk. This is especially the case in California where utilities operate under a strict liability standard known as “inverse condemnation” that can potentially lead to a material increase in liability exposure if the utilities’ equipment is implicated in the cause of a fire. This standard was unfortunately illustrated in 2019 with the Pacific Gas & Electric (for-profit utility) bankruptcy as a result of the Camp Fires in 2018¹.

Our investment process is predicated on identifying risks and receiving adequate compensation for that risk. While we do share the view that the Los Angeles Department of Water & Power (and related entities) is a systemically important issuer as the largest municipal utility in the country, with access to liquidity and potential support from the state. We do not, however, have any clarity, nor does anyone else, on the magnitude of their potential liability from the 2025 fires and the resulting impact to their credit rating. Due to insatiable demand for California municipal bonds given the state’s high taxes, many California issuers are issuing bonds that, despite having credit ratings inferior to AAA national rates, are yielding below those of AAA quality, effectively receiving a subsidy from investors. Or stated another way, investors may not be adequately compensated for the increased credit risks they are bearing. Illustrative of this is Los Angeles Department of Water & Power (AA-, Aa2, A) which in December 2024 offered yields on par with national AAA bonds² though their credit rating was 5 notches lower. Spreads widened by +50-60 basis points following the wildfires in January 2025 and began on a path lower to +35 by October, and most recently to +20 basis points as a new issue of power revenue bonds were brought to market last month³.

As investors appear to be willing to accept such nominal compensation for an unknown risk, we ask why? Especially when there are alternatives, in-state and out of state (on an after-state tax basis), that provide comparable or greater yields. Even the rating agencies affirming ratings acknowledge the outcome of litigation pertaining to Los Angeles Department of Water & Power’s culpability in contributing to the progression of the fires and subsequent damage, are an unknown. If found liable, these losses could be quite material for the entity and perhaps damaging to ratings. This could cause potential spread widening given these aforementioned risks do not appear to be adequately factored into current prices.

Back to Archives

https://cdn.ca9.uscourts.gov/datastore/opinions/2022/08/29/21-16043.pdf ↩︎
“Los Angeles wildfires bring wider spreads, downgrade for DWP”, The Bond Buyer, January 14, 2025 ↩︎
“Los Angeles DWP pricing gains traction after wildfire”, The Bond Buyer, January 27, 2026 ↩︎

December 2025

We are very proud to share that a highly valued member of the Clinton Investment Management team, Alexander Clinton, has been bestowed with Smith’s Research & Gradings 2025 Rising All-Star Municipal Analysts Award. This honor recognizes individuals for outstanding contributions to and achievements within the municipal bond investment community.

Alex, working alongside Shivani Singh, Head of Credit Research, is a core member of our research team and his professional integrity, diligence, attention to detail, and ability to correlate and connect dots in a broader credit perspective is impressive. This award recognizes his hard work, talent, and perseverance, creating significant value for our clients.

Congratulations to Alex for earning this prestigious award!

Back to Archives

Muni tax loss harvesting and opportunity to deliver tax alpha in the first 9 months was successful for our clients, as CIM has delivered over 0.30%, 30 basis points of tax alpha year-to-date. *
The positive narrative shift and constructive outlook for the municipal bond market has resulted in the best total return for October in over 30 years.
The scale of the opportunity in longer duration municipal bonds persists, as munis with longer maturities remain one to two z-scores/standard deviations cheap to corporates, indicating the scale of the opportunity for municipal bonds to continue outperforming.
As we expected, the Fed has resumed cutting interest rates due to considerable weakening in the labor market and subdued inflation, despite tariff effects.
Investors with large exposures to passive, short duration bonds and preferred savings are likely to experience significantly reduced cash flow, as short-term rates fall further and reinvestment opportunities dwindle.
Munis continue to offer some of the highest returns, on an after-tax basis from an income perspective, compared to other fixed income alternatives.
Our strategies, with an average credit quality of AA/A, are targeting taxable equivalent yields of 7% to over 8%, assuming an individual is in the highest tax bracket and a resident of high tax states like NY or CA.** Broader municipal sector credit fundamentals remain resilient notwithstanding a slowdown in the economy.
Municipal bond defaults are rare and sector default rates are strikingly lower than their corporate peers.
Expected further declines in CPI in 2026, as base effects of tariffs fade, appear not to be priced into fixed income markets.
Technical conditions have historically had an outsized impact on municipal bond returns. Muni technicals have turned significantly positive in recent weeks as demand, in the form of asset class inflows into municipal bond mutual funds, have accelerated since September as supply has fallen by over 58% since 10/16/25.

*CIM defines Tax Alpha as the potential value created through tax-loss harvesting techniques that fully offset a capital gain and is derived by calculating the composite capital losses divided by the average composite assets and multiplied by the maximum capital gains tax rate of 23.8% (20% plus 3.8% Net Investment Income Tax), for any stated period. Tax-loss harvesting is any transaction resulting in a capital loss. Although realized capital losses can potentially offset capital gains, reduce taxes paid, and enhance after-tax returns, individual results will vary dependent upon an investor’s actual tax rates, the presence of current or future capital loss carry forwards, and other investor specific tax circumstances. Tax-loss harvesting may not achieve actual value creation.

**The taxable equivalent yield represents the yield that must be earned on a fully taxable investment in order to equal the tax-exempt yield of the composite. The taxable equivalent yield is calculated by dividing the tax-exempt yield by 1- the maximum federal income tax rate of 40.8% (37% federal + 3.8% NII tax). For CA the calculation includes the addition of a maximum state tax rate of 13.30%. For NY the calculation includes the addition of a maximum state tax rate of 9.65% applicable to a single filer in the taxable income bracket between $1,077.551 and $5,000,000.

This material has been provided for informational purposes only and is not intended by Clinton Investment Management to provide and should not be relied on for tax, legal or accounting advice. If such advice is required, please consult with your own tax, legal and accounting advisors.

Please remember that past performance may not be indicative of future results. Net-of-fee performance returns are calculated by deducting the actual Clinton Investment Management, LLC investment management fee from the gross returns. Performance returns include the reinvestment of income and capital gains. Actual results may differ from the composite results depending upon the size of the account, investment objectives, guidelines and restrictions, inception of the account and other factors. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Clinton Investment Management, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Please consult with an investment professional before making any investment using content or implied content from any investment manager. A copy of our current written disclosure statement discussing our advisory services and fees is available upon request.

The views and opinions expressed are not necessarily those of the distributing firm or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent your firm’s policies, procedures, rules, and guidelines.

Back to Archives