California gets top ratings on planned debt sale
California on Thursday got the highest possible credit ratings on the short-term debt it plans to issue the week of Sept. 12. That’s should be good for taxpayers, at the expense of the investors who are expected to buy the securities.
Standard & Poor’s rated the debt SP-1+, the first time California has received that top-rung rating from S&P since 2007, Treasurer Bill Lockyer said.
Moody’s Investors Service also gave the debt the highest possible rating, at MIG-1.
The state expects to raise $5.4 billion via the sale of so-called revenue anticipation notes, or RANs. Lockyer will use the money to pay off a bank loan the state took out in late July.
California and many other state and local governments issue RANs at this time of year to bridge the gap between their cash needs and the arrival of tax revenue later in the fiscal year. California's notes will mature in late spring of next year.
Lockyer had planned to sell RANs in August. But fearing that the debate in Washington over the federal debt ceiling might rile financial markets, he chose to borrow first from major banks to have the money in hand, and sell notes later to retire the bank loan.
Credit rating firms typically grade RAN debt based on the amount of cash the borrowers are expected to have on hand when the securities mature. Moody’s said in a statement Thursday that it expected the state to have cash “sufficient to repay the notes with moderate additional cushion, even in the case of [budget] stress scenarios run by Moody's.”
Gov. Jerry Brown lauded the ratings decisions, calling them “a strong indication that our state’s finances are on the right track. Despite the uncertain economy, I intend to do everything possible to keep state revenues and spending in balance.”
California borrowed $10 billion via RANs last November and had to pay dearly because of upheaval in the municipal debt market at the time. Investors were dumping muni securities nationwide because of worries about state and local governments’ finances.
Lockyer was forced to boost interest rates on the notes to get the deal done. The state paid a hefty tax-free annualized yield of 1.5% on notes that matured in May and 1.75% on notes that matured in June. Because those yields are exempt from state and federal income taxes for California residents, they're equivalent to much higher taxable yields, depending on an investor’s tax bracket.
This time around, short-term interest rates in general are well below their levels of last fall, and the muni bond market is relatively placid. That backdrop, along with the top ratings from S&P and Moody’s, should mean the RANs will cost the state a fraction of what it paid last year.
Last month, Texas sold $9.8 billion of short-term notes at an average annualized interest rate of just 0.27%.
Historically, California’s RANs have been popular with individual investors. Lockyer will allow individuals to put in orders for the notes on Sept. 13-14. Orders must be placed with brokerages; the state doesn’t sell directly to investors.
Institutional investors will bid on Sept. 15, which is when the interest rates will be set.
-- Tom Petruno
Top photo credit: Makaristos
Inset photo: Treasurer Bill Lockyer. Credit: Armando Arorizo/Bloomberg News