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California plans big bond sale, with U.S. taxpayers' help

April 6, 2009 |  6:02 pm

California, which just completed one of the largest municipal bond offerings in U.S. history, will go back to investors for another big chunk of change this month.

This time, the state plans to sell taxable rather than tax-free bonds. A portion of the deal will be subsidized by U.S. taxpayers under Congress’ new Build America Bonds plan, part of the economic-stimulus program.

State Treasurer Bill Lockyer may try to raise as much as $4 billion via taxable bonds either next week or the week of April 20, spokesman Tom Dresslar said.

Lockyer Part of the offering will be used to finance projects that don’t qualify for tax-free funding -- such as the stem-cell research measure that California voters approved in 2004.

The rest of the deal will finance traditional infrastructure projects that usually are funded with tax-free bonds. Lockyer will use taxable bonds instead because the U.S. Treasury will pick up part of the interest cost of the securities.

Under the Build America Bonds program, states and other municipal issuers can choose to sell taxable bonds for public-works projects and have the federal government pick up 35% of the annual interest expense on the securities.

That could be a great deal for California -- depending on what it has to pay on taxable bonds.

On Monday, food-products maker ConAgra Foods Inc. paid a 7% annualized yield on new 10-year bonds. ConAgra’s credit rating from Moody’s Investors Service is Baa2.

California is rated A2 by Moody’s. So in theory, the state should pay less than what ConAgra paid.

Assume, though, that investors demand a 7% taxable yield on 10-year California bonds. With U.S. taxpayers picking up 35% of that, the net annual interest cost to the state would be 4.55%.

That would be less than the 4.9% the state paid on the 10-year bonds that were part of its $6.5-billion tax-free debt sale two weeks ago.

Last month’s bond sale attracted huge demand from individual investors. But Lockyer hasn’t decided whether to pitch the taxable bonds to individuals, his spokesman said. That’s because there may be ample demand from pension funds, foreigners and other investors that normally don’t buy tax-free bonds.

California will be one of the first big issuers out of the gate with Build America Bonds. That could turn out to be a smart move on Lockyer’s part, before the market is saturated with such debt, said Marilyn Cohen, a bond expert and head of Envision Capital Management in L.A.

But she urged Lockyer to follow the same sales format as with tax-free bonds, and allow individual investors to place orders ahead of institutions.

"There are a lot of individual investors who . . . would take a look at these for tax-deferred accounts" such as IRAs, she said.

-- Tom Petruno

Photo: California Treasurer Bill Lockyer

 

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