Tags: California | Budget | Gap | Note | Sale

California’s Budget Gap Looms Over Note Sale

Monday, 15 November 2010 09:21 AM

California is selling $10 billion of one-year notes to boost cash on hand, as the state that produces 13 percent of the U.S. gross domestic product tries to assure investors it can repay the loan amid a $25 billion budget gap.

The state will take orders today and tomorrow from individual investors for revenue anticipation notes, short-term municipal bonds known as RANs that the state offers when cash is low and repays from later tax collections. There are two portions to the sale, one maturing in May and the other in June. Institutional investors such as mutual funds will place orders Nov. 17. JPMorgan Chase & Co. will manage the sale, along with De La Rosa & Co. and Wells Fargo Securities.

The issue comes after the state’s Legislative Analyst’s Office said California’s deficit may exceed $25 billion in the next 19 months, including $6.1 billion in the fiscal year that ends in June. Treasurer Bill Lockyer also is selling $3.75 billion of long-term obligations starting later this week.

“If you are full on California then don’t add fuel to the fire,” said Marilyn Cohen, chief executive officer of Envision Capital Management in Los Angeles, who manages $250 million in fixed-income assets. “If you hardly have any California exposure and you’ve got money sitting in money markets, then you better make sure it’s worth your while because the news headlines are going to continue to go from bad to terminal.”

Rising Yields

California’s notes come to market after yields on top-rated one-year municipal bonds rose 1 basis point to 0.42 percent Nov. 12 after falling to the lowest on record in August. Top-rated one-year municipal bonds yielded 0.3 percent on Aug. 18, according to Municipal Market Advisors data, the lowest since the index began in 2001. A basis point is 0.01 percentage point.

The notes are rated F2 by Fitch Ratings, its third highest. Standard & Poor’s rated the notes SP-1, second highest, while Moody’s Investors Service assigned the notes MIG-1, its top rating. S&P ranks California’s long-term debt at A-, its fourth- lowest investment grade, the riskiest among U.S. states.

The LAO deficit projection “doesn’t surprise us, and it should not surprise investors,” said Tom Dresslar, a spokesman for Lockyer. “We fully disclosed potential budget problems in our prospectus for the RAN deal, and we do not expect the LAO’s projection to affect the cash-flow borrowing transaction. We still will have more than enough cash available to repay the RANs on time and in full.”

2009 Notes Sale

When California sold $8.8 billion of one-year debt on Sept. 23 last year, notes that matured in May were priced to yield 1.25 percent, or about 59 basis points more than top-rated one- year bonds, according to data from MMA, an independent research firm based in Concord, Massachusetts. Notes that matured in June were priced to yield 1.5 percent, or 84 basis points more than top-rated debt at the time.

Lockyer was able to sell $6.64 billion of those notes to individual investors, or about 75 percent of the total.

The “punitive” yield California pays this year will be determined by the amount of individual investor interest the state can draw, said Regina Shafer, who oversees $5.3 billion in tax-exempt municipal bonds as assistant vice president of fixed- income investments for USAA Investment Management Co. in San Antonio, Texas. The notes will be attractive to retail buyers compared with other cash alternatives such as money market funds, which offer lower yields, she said.

“Given the marketing effort, it’ll probably be priced pretty easily,” Shafer said. “Where states have a high tax rate, it’s very attractive. I think retail will be very successful.”

Texas Borrowings

Texas borrowed $7.8 billion Aug. 24 through the sale of one-year tax- and revenue-anticipation notes, paying a weighted average interest cost of 0.34 percent, or 4 basis points more than top-rated, one-year bonds, according to the comptroller’s website for the sale. The notes carried the highest short-term ratings from Moody’s, S&P and Fitch.

New Jersey, whose short-term debt also carries a top credit ranking, borrowed $2.25 billion priced to yield 0.33 percent on Aug. 19. That was 3 basis points more than top-rated debt at the time.

California sold about $6.3 billion in general-obligation debt following its RANs sale last year, Bloomberg data show. Amid increased supply, the extra yield above AAA bonds investors demanded for 10-year debt from state issuers increased to 158 basis points by year-end from 104 basis points on Oct. 8.

States and municipalities are poised to borrow about $17.6 billion this week, the most on record, according to data compiled by Bloomberg dating to 2003. Issuers plan to offer more than $20.1 billion in the next 30 days, according to the Bloomberg visible supply index on Nov. 12, the most since Oct. 23, 2009, and almost double the daily average this year.

Following are descriptions of pending sales of U.S. municipal debt:

TEXAS PUBLIC FINANCE AUTHORITY, the agency responsible for issuing debt for state agencies, plans to sell about $1.2 billion in tax-exempt bonds for the Texas Workforce Commission this week. The revenue bonds, backed by a tax on the state’s 570,000 employers, will replenish the Texas unemployment trust fund and pay back almost $2 billion in advances from the federal government, according to an S&P report. Bank of America Merrill Lynch will lead the group marketing the bonds, which mature in July 2011 through January 2018 and are rated AAA by S&P and one level lower by Fitch and Moody’s. (Updated Nov. 15)

PORT AUTHORITY OF NEW YORK AND NEW JERSEY, which owns the World Trade Center site in addition to operating Newark Liberty International, John F. Kennedy International and LaGuardia airports, will sell more than $800 million in tax-exempt bonds this week. The issue will fund expansion of JFK’s Terminal Four, according to a Fitch report. Citigroup Inc. will market the issue, which is rated Baa3 by Moody’s and BBB- by S&P, both one level above junk, and BB by Fitch, second-highest speculative grade. (Updated Nov. 15)

DALLAS INDEPENDENT SCHOOL DISTRICT, which enrolled 157,000 students this year, will issue about $1.02 billion in general obligations through competitive sales tomorrow, including $871 million in Build America Bonds, to refinance existing debt and fund capital improvements. The debt, which is secured by property taxes in the district, is rated third-highest by Moody’s and Fitch, Aa2 and AA, and fifth-highest by S&P, A+. The bonds also have an enhanced rating of AAA by all three companies because of a payment guarantee by the Texas Permanent School Fund. (Added Nov. 15)

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California is selling $10 billion of one-year notes to boost cash on hand, as the state that produces 13 percent of the U.S. gross domestic product tries to assure investors it can repay the loan amid a $25 billion budget gap.The state will take orders today and tomorrow...
Monday, 15 November 2010 09:21 AM
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