Bloomberg News

Brown Upgraded in Market as California Gap Shrinks: Muni Credit

September 14, 2011

Sept. 14 (Bloomberg) -- Governor Jerry Brown’s campaign to shrink California’s deficit helped the most-populous U.S. state slash borrowing costs as much as 88 percent on a $5.4 billion note sale, exceeding yield declines in short-term municipal securities.

California took orders for two-thirds of the revenue- anticipation notes from individual investors, said Tom Dresslar, a spokesman for Treasurer Bill Lockyer. A tranche maturing May 24 was priced at 0.38 percent, while the bulk of the bonds, maturing June 26, were offered at 0.40 percent.

The notes, meant to bolster cash flow until taxes are collected, were offered with yields as low as 17 basis points above yields on AAA rated tax-exempt debt maturing in one year, according to data compiled by Bloomberg. That compares with 144 basis points above that benchmark on a $10 billion sale of such notes in November. A basis point is 0.01 percentage point.

“California’s economy is huge, it’s diverse and it’s moving in the right direction from a fiscal perspective and it’s being evidenced in the low yields and the relatively high level of demand that we expect to see from this deal,” Neil Klein, who manages $925 million at New York-based Carret Asset Management, said yesterday in an interview.

Brown, 73, in June brokered an $85.9 billion general-fund spending plan with fellow Democrats that filled a $26 billion deficit with $12 billion in spending cuts and an equal amount of revenue growth. The state would have run out of money if there had been a repeat of last year, when Republican Governor Arnold Schwarzenegger locked horns with lawmakers over a similar deficit for 100 days past the start of the fiscal year.

Improved Rating

California was able to offer the lower yields after Standard & Poor’s awarded the revenue anticipation notes its highest credit rating since 2007. The company also rescinded the state’s negative long-term outlook after the austerity budget was enacted in June.

Yields on the state’s short-term debt have dropped by about 80 percent compared with last year, while rates on top-rated one-year general-obligation debt have decreased by one-third, according to Bloomberg data.

Following Schwarzenegger’s late budget last year, California sold $7.75 billion of RANs on Nov. 18 that matured in June, yielding 1.75 percent, or 154 basis points more than the 0.40 percent offered today. In comparison, yields on top-rated one-year debt were 0.21 percent yesterday, down from 0.313 percent on Nov. 18.

Improving Economy

The deal benefited from an improving economy, pent-up demand for the debt following Brown’s January suspension of bond issues and relatively higher yields compared with states such as Texas, which carries the same short-term rating. S&P rates the state’s long-term debt at AA+, the second-highest grade, compared with California’s A-, the lowest among U.S. states.

The note sale is “being pretty well received,” said George Hribar, head bond trader at Alamo Capital in Walnut Creek, California, one of the firms marketing the issue. “It came to the market just cheap enough to be enticing for short- term paper.”

Texas on Aug. 23 sold $9.8 billion of general-obligation tax and revenue anticipation notes due August 2012. The security traded the same day at an average yield of 0.25 percent, 15 basis points to 30 basis points below California’s preliminary range yesterday of 0.40 percent to 0.55 percent.

“Historically there wasn’t necessarily this spread between the two,” William Henderson, who oversees $16 billion of short- term municipal assets at BlackRock Inc. in Princeton, New Jersey. “But in recent years as California ran into credit issues, there was a spread created.”

Budget Passage

Passage of the budget for the year that began July 1 cleared the way for Lockyer to sell the short-term securities because the budget must show there’s enough money left over at year’s end to repay investors.

Lockyer plans to use the proceeds from the revenue notes to pay off a cash-flow loan he secured July 27 from Goldman Sachs Group Inc., Wells Fargo & Co., six other banks and investors. The treasurer took the loan anticipating a possible credit- market disruption as Congress debated raising the nation’s debt ceiling.

Without that bridge loan, the state was in danger of running out of money, as it did in 2009, when the controller issued $2.6 billion of IOUs amid a legislative budget impasse.

--With assistance from Chris Palmeri in Los Angeles and James Nash in Sacramento. Editors: Pete Young, Jerry Hart

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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