California power-bond sale sees strong demand from individual investors

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Individual investors’ hunger for yield is showing up in robust demand for this week’s big power-supply bond offering from the California Department of Water Resources.

The state’s brokerage network already has $1 billion in individual-investor orders for a total of $2 billion in bonds to be sold, according to a tally released by Treasurer Bill Lockyer’s office Monday. The so-called retail order period will continue on Tuesday, and on Wednesday institutional investors such as mutual funds will bid for the bonds that remain.

The preliminary tax-free yields on the debt range from 0.94% on two-year bonds to 3.80% on bonds maturing in 2022. The interest is exempt from state and federal income taxes. Final yields will be set on Wednesday, and could be higher or lower than the preliminary estimates depending on institutional demand.

Lockyer is selling the water-department revenue bonds to refinance debt issued during the state’s power crisis in 2001 and 2002, when California was forced to borrow to pay for electricity.

Because the bonds are backed by surcharges paid by customers of the state’s major electric utilities, credit rating firms have given the debt higher quality ratings compared with the state’s general obligation bonds.

Moody’s Investors Service, for example, rates the power bonds Aa3, well above the A1 grade the firm gives the state’s general-obligation debt.

But higher ratings also mean lower yields. For example, the preliminary annualized yield on the power bonds maturing in 2015 is 2.32%. By contrast, the state paid 2.57% on general-obligation bonds of the same maturity sold in March.

The power bonds maturing in 2022 are expected to pay an annualized yield of 3.80%, compared with 4.65% on California general obligation bonds of the same maturity sold in March.

Muni bond yields in general have declined since March, which also is lowering the state’s borrowing costs. With short-term interest rates still near rock-bottom, many investors have been desperate to find higher-yielding alternatives for their money, and the muni bond market has been a big beneficiary of that hunt for yield.

Refinancing the power-crisis debt will lead to a reduction in the surcharges California consumers now pay for electricity, Lockyer spokesman Tom Dresslar said. “They will see the reduction reflected in their surcharges starting January 2011,” he said.

Morgan Stanley, De La Rosa & Co. and JPMorgan Chase are leading the state’s brokerage network for the power-bonds offering.
-- Tom Petruno