Small investors won’t get preference in state bond sale

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California will sell up to $4 billion in taxable general obligation bonds on Tuesday without following its usual custom of offering individual investors first crack at ordering the securities.

That means big investors such as pension funds, foreign banks and insurance companies will dictate the terms on the bonds and have the chance to snap them up for their own portfolios.

That’s a shame, because I’ve heard from more than one financial advisor that their individual investor clients were considering the bonds for tax-deferred investment accounts. The federally taxable yields on the longest-term securities (20 to 30 years) are expected to be in the range of 6% to 7%.

The state is issuing taxable bonds, rather than normal tax-exempt securities, because some of the bonds will be sold under the federal government’s Build America Bonds plan. The program allows states and other muni issuers to sell taxable bonds to fund infrastructure projects and have the U.S. Treasury pick up 35% of the annual interest bill on the securities.

The net result: California should save money compared with the rates it would have to pay on standard tax-free bonds.

So why not let yield-hungry individual investors in on this deal? The state’s explanation is that it doesn’t have much experience issuing taxable bonds, and needs to rely on the guidance of its Wall Street underwriters, led by Goldman Sachs and J.P. Morgan, which will be negotiating with big investors on the state’s behalf.

Of course, if individual investors stepped up for a large chunk of the bonds, as they have in recent tax-free offerings, that would leave fewer for the big-money clients of Goldman and Morgan. In a typical California tax-free bond deal, individual orders are taken first, and institutions get what’s left.

Some individual investors may still get the bonds -- if they’re good customers of the relative handful of firms in the underwriting syndicate. (See the list here – click on ‘view cover.’) If your brokerage isn’t listed, you can ask it to order from one of the syndicate members, but that’s no cinch.

‘Our hope with future Build America Bonds is to have a more aggressive retail aspect’ to the sales, said Tom Dresslar, spokesman for Treasurer Bill Lockyer.

Locked-out individual investors may hope so, too.

-- Tom Petruno