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Investors make city of L.A. pay up in debt sale

The city of Los Angeles struggled to borrow $1.2 billion this week via short-term notes -- a sign of investors’ unease about the city’s financial outlook.

The sale of the so-called tax and revenue anticipation notes, or TRANs, usually is a routine event for many California cities and counties at midyear. The notes, which mostly mature next spring, bring in cash to help pay expenses before tax monies arrive in government coffers during the fiscal year that began Thursday.

But L.A.’s note sale was no breeze this time. The big buyers of short-term TRANs are money market mutual funds, and they were relentless in asking questions about the risks to L.A.’s fiscal health, said Natalie Brill, the city’s chief of debt management.

In 10 years on the job, “This is the most I’ve ever talked to investors” about a TRAN sale, Brill said. Even though the notes had top credit ratings from debt-rating firms, “It didn’t seem to matter,” she said.

Lacityseal The city ended up selling the notes in four sections, maturing next March, April, May and June. But investors mostly balked at the June notes, which totaled $290 million, Brill said. That part of the deal was bought by JPMorgan Securities, the city’s underwriter, at an annualized tax-free yield of 0.85%.

The other maturities were sold at yields of 0.55%, 0.60% and 0.80%.

By contrast, the city paid an interest rate of 0.48% on the TRAN deal it sold a year ago. Every dollar in extra interest cost takes cash away from other city spending needs.

The 0.85% tax-free yield on the TRANs maturing next June also was well above the yields paid by many other California cities and counties on their recent deals. Ventura County borrowed $130 million via TRANs last month and paid just 0.38%. The L.A. Unified School District’s deal last month cost it 0.67%.

Los Angeles County, however, also had to pay 0.85% to sell its notes last month. "The market is really skittish right now," said Glenn Byers, county assistant treasurer. Investors win, taxpayers lose.

Among municipal borrowers, “It’s now a real stratified market between the haves and the have-nots,” said Brad Thiel, head of California muni bond underwriting at Wedbush Morgan Securities in L.A.

The money market funds’ concern typically isn’t that a TRAN borrower won’t repay the notes on schedule, but that some bad news about the borrower’s finances over the next year could make the funds that own the debt look riskier to their investors.

The funds “don’t want any ‘headline’ risk,” said Paul Derse, Ventura County’s chief financial officer.

My colleague David Zahniser, who covers City Hall, notes that L.A. currently has a balanced budget for the new fiscal year, but that it hinges on a plan to lease nine parking garages, generating $53 million in revenue. If that money doesn’t materialize, officials would need to eliminate an estimated 1,000 additional city jobs, according to city budget projections.

-- Tom Petruno

 
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