Bloomberg News

California’s Cash Notes Win Highest S&P Rating in Four Years

September 02, 2011

(Adds Fitch rating in second paragraph.)

Sept. 2 (Bloomberg) -- California’s $5.4 billion sale of revenue-anticipation notes won Standard & Poor’s top short-term credit rating for the first time since 2007, Treasurer Bill Lockyer said.

S&P assigned a rating of SP-1+ to the Sept. 15 issue, citing California’s smaller-than-usual borrowing and ability to absorb declines in cash flow without threatening the notes, known as RANs. Moody’s Investors Service graded the securities MIG-1, its highest for short-term debt. Fitch Ratings gave the notes an F1, its second highest.

“This is a strong indication that our state’s finances are on the right track,” Governor Jerry Brown said in a statement yesterday.

The largest U.S. municipal borrower will use the proceeds to repay a loan Lockyer rushed to secure from Goldman Sachs Group Inc., Wells Fargo & Co. and six other banks and investors July 27. The treasurer said he acted in anticipation of a credit-market disruption if the U.S. should default on its debt as Congress debated raising the nation’s debt ceiling.

“These top ratings reflect the strength” of the state budget, Lockyer said in a statement. “Particularly important from an investor standpoint are the spending cuts that will be triggered automatically if revenues fall short of projections.”

The most-populous state’s $86 billion general-fund spending plan for the fiscal year that began in July includes a series of so-called triggers. The first would cut spending if revenue falls $1 billion short of plan. A $2 billion gap would mean a seven-day reduction in the school year and an end to busing subsidies.

Return to Market

The sale will mark California’s return to the municipal market after Lockyer and Brown imposed a voluntary moratorium on debt sales this year to curb costs. Lockyer plans to sell as much as $2.6 billion of general-obligation bonds Sept. 20.

California’s RANs will go to market as yields on such debt have plunged along with Treasuries. One-year tax-exempt note yields fell to 0.31 percent yesterday, according to a Bond Buyer index, down from 0.51 percent a year earlier and 3.62 percent in 2007, before the recession. One- to three-year Treasury yields also fell in the last year, to a record-low 0.56 percent yesterday from 0.9.

California sold $10 billion of RANs at the end of November. The sale included $2.25 billion of notes that came due in May with a yield of 1.5 percent and $7.75 billion that matured in June at 1.75 percent.

The May notes yielded 98 basis points, or 0.98 percentage point, more than top-rated one-year debt at the time and the June notes yielded 123 basis points more, Municipal Market Advisors data show.

Lowest Rating

California has the lowest general-obligation credit rating of any state from Standard & Poor’s. While it is typically the largest U.S. issuer of municipal debt, the state hasn’t sold any general-obligation bonds in 2011 as legislators debated solutions for a $26 billion deficit.

S&P downgraded California’s credit in January 2010. The state is rated A1 by Moody’s Investors Service, its fifth- highest grade, and A- by Fitch Ratings, seventh highest. After passage of the budget June 30, Standard & Poor’s raised its outlook to stable from negative, meaning the possibility of a downgrade had decreased.

Ten-year general obligation bonds from California state issuers yield 3.64 percent on average, or about 1.30 percentage points more than average top-rated debt of that maturity, according to Bloomberg Fair Value indexes.

--Editors: Pete Young, Ted Bunker

To contact the reporter on this story: Michael B. Marois in Sacramento at

To contact the editor responsible for this story: Mark Tannenbaum at

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