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Moody's, S&P weigh in on big California debt sale

September 14, 2009 |  3:54 pm

Credit-rating firms Moody’s Investors Service and Standard & Poor’s today gave California high ratings on the $8.8 billion of short-term notes Treasurer Bill Lockyer plans to sell next week.

Moody’s was the most generous, grading the debt "MIG 1," the firm’s highest rating. S&P gave the notes a rating of "SP-1," just below its top grade of "SP-1-plus."

The new ratings could help draw orders for the notes from money market mutual funds and other institutional investors that are restricted to owning only high-quality short-term debt.

Lockyer already was counting on heavy demand for the debt from individual investors looking for a place to stash their cash for the next eight to nine months. The ratings from Moody’s and S&P could lower the interest rate the state will pay on the securities, known as revenue anticipation notes, or RANs.

Bearflag Muni bond analysts have been forecasting that the annualized tax-free yield on the RANs, which will mature by June 30, would be between 1% and 3%, depending on investor demand. The interest is exempt from state and federal income tax for California investors, so even at 1% the return would far exceed what investors can earn on other short-term securities.

One-year U.S. Treasury bills, for example, pay just 0.36%, although they’re obviously a higher-quality security than a California note.

The state usually borrows via RANs in late summer or fall to bridge the gap between its current spending needs and the receipt of tax revenue later in the fiscal year, which ends June 30. The notes must mature within the fiscal year, and typically are repaid in May or June.

Lockyer initially said the sale might total as much as $10.5 billion. But last-minute fiscal maneuvers by the Legislature last week allowed Lockyer to reduce the offering to $8.8 billion.

Although California has the lowest credit ratings of the 50 states on its long-term bonds, Moody’s said the top rating on the RANs was warranted because the firm expected the state to have a "enough available cash and borrowables to repay the notes" as scheduled by June 30.

Even after running its own "stress test" of the state’s finances given the still-dicey economic outlook, Moody’s said it found that Sacramento "is still able to repay the notes with a modest but sufficient cash cushion available after repayment."

S&P said it believed that "the state's capacity to repay its notes is strong," but cited "certain risks that limit our view of the state's credit strength for the remainder of the fiscal year." One of those risks, S&P said, was the "political environment" in California, which the firm said "may allow for a limited appetite among lawmakers for additional budget reductions or revenue increases, should they be necessary."

The state will sell the notes Sept. 21-23 via brokerages. Individual investors will be allowed to place orders on Sept. 21 and 22 (minimum order: $5,000). Institutional investors will put in orders on Sept. 23, and that’s when the final rates on the notes will be set.

For more information see Lockyer’s website buycaliforniabonds.

-- Tom Petruno

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