California to launch $14 billion in debt sales
California is counting on investors to buy almost $14 billion in new debt over the next two weeks as the state returns to the bond market after the drawn-out battle to reach a budget agreement.
The budget deal of Oct. 8 already looks out of date: The state’s chief fiscal analyst on Wednesday estimated that Sacramento will have to plug a total of $25.4 billion in deficits by mid-2012.
That may make some bond investors nervous, but many have gotten used to scary fiscal headlines about California for the last decade. The recurring budget mess hasn’t affected the state’s ability to make interest or principal payments on its debt, and Treasurer Bill Lockyer has repeatedly reminded Wall Street that the state Constitution mandates that bond investors must be paid.
(The same can’t be said for vendors and other creditors who once again this year were stiffed by the state until a budget was in hand, 100 days late.)
The biggest portion of the upcoming debt sales will be so-called revenue anticipation notes, or RANs. These are short-term notes that the state typically has issued each autumn to tide it over until tax revenue arrives later in the fiscal year.
Lockyer is counting on heavy demand for the securities from individual investors. The appeal of the RANs: They’re likely to pay annualized tax-free interest yields of between 1% and 1.5%, at a time when interest rates on most short-term securities are far lower.
A one-year U.S. Treasury bill, for example, pays a mere 0.2%. The average yield on money market mutual funds is a barely detectable 0.01%.
Although $10 billion is a huge sum to raise all at once, the state easily sold $8.8 billion of RANs in September 2009. The series that matured in May 2010 paid investors an annualized yield of 1.25%; the series that matured in June paid 1.50%. Interest on the state’s debt is exempt from federal and California income tax.
Next week’s sale “is a lot of debt, but [investors] are desperate” for yield, said Matt Fabian, senior analyst at research firm Municipal Market Advisors in Westport, Conn.
The state will give preliminary estimates of the yields on the RANs on Monday morning and will allow individual investors to place orders for the securities on Monday and Tuesday. The final yields will be set on Wednesday after institutional investors have placed their orders. If individual buyers don’t like the final yields they can opt out.
The state will sell the RANs via a network of brokerages led by JPMorgan Securities, De La Rosa & Co. and Wells Fargo Securities. Investors must put in orders via a brokerage; the state doesn’t issue its debt directly to buyers. The minimum investment is $5,000.
The two best-known credit-rating firms, Standard & Poor’s and Moody’s Investors Service, this week gave the RANs their highest-quality ratings, although S&P's rating of SP-1 was one notch below its ultimate grade of SP-1-plus. A third firm, Fitch Ratings, gave the securities its second-highest overall rating.
After the RAN sale is completed, Lockyer plans two long-term general-obligation bond offerings to fund voter-approved infrastructure projects.
The state will sell $2 billion of taxable Build America Bonds on Nov. 18, a deal expected to be purchased mostly by institutional investors. That will be followed by the sale of $1.75 billion of conventional tax-free bonds on Nov. 23.
Individual investors will be able to put in orders for the tax-free issues on Nov. 19 and 22; the final yields will be set on Nov. 23. The state usually sells tax-free bonds in maturities ranging from one year to 30 years.
For more on how to invest in the state's debt, go to Lockyer's website, buycaliforniabonds.
-- Tom Petruno