Bloomberg News

California Raises Yields on Final Day of Bond Offering

April 13, 2012

California (STOCA1:US) sold $1.35 billion of general-obligation debt, increasing yields to institutional investors after receiving orders for almost 31 percent from individuals, the lowest level of participation this year.

The yield on a bond maturing in 10 years was raised to 2.87 percent yesterday, when institutional investors placed orders, from a preliminary 2.82 percent April 11, when marketing to individuals ended, according to the state treasurer’s office.

“Given the supply that they’ve put into the market in a relatively short period of time, I thought the deal was well- received,” Mark DeMitry, a senior portfolio manager at OppenheimerFunds Inc. in Rochester, New York, said yesterday by telephone. He helps manage $32 billion in municipal debt.

Individuals ordered 31 percent, or $418.9 million, of the bonds, according to Tom Dresslar, a spokesman for Treasurer Bill Lockyer. The sale will save California taxpayers $56.9 million on long-term borrowing costs, Dresslar said, citing $464 million in refinanced debt as part of the offering.

“The refunded bonds produce the borrowing-cost savings for taxpayers, because the new interest rates on those bonds are lower,” Dresslar said yesterday by e-mail.

Three-Year Low

The final 10-year yield was 73 basis points higher than a Bloomberg Fair Value index of top-rated municipal debt. The spread, or difference compared with AAA securities, hasn’t been that small since December 2008, according to data compiled by Bloomberg. Bonds with a 5 percent coupon and due in 30 years yielded 4.39 percent, or 74 basis points higher than the index.

“The spreads between California general obligations and triple A show a good acceptance of California paper,” said Joseph Rosenblum, municipal-credit research director at AllianceBernstein LP in New York. The firm manages $5 billion in municipal debt issued in the state, including about 12 percent in California GO bonds.

The most-populous U.S. state sold $2 billion of general- obligation debt from Feb. 28 to March 1 with the 10-year portion yielding 2.78 percent, or 80 basis points above the top-grade index. Individuals bought about 47 percent of that offering, up from almost 24 percent in a similar Oct. 17-19 sale.

Standard & Poor’s puts California’s credit at A-, its fourth-lowest investment grade and its worst ranking for any state’s general-obligation debt. The rating company in February changed its outlook to positive after Governor Jerry Brown, 74, and lawmakers took steps to ease a projected cash shortfall and cut a $20 billion annual structural deficit by three quarters.

Fiscal Progress

“They have made some progress in terms of their financial situation,” AllianceBernstein’s Rosenblum said.

The latest sale wrapped up yesterday as institutional investors such as mutual funds placed orders and final prices were set. Lockyer sold $890 million to pay for public works along with the refinancing.

California has reduced the amount of general-obligation debt it sells to the smallest two-year total since 2006 as lawmakers work to erase deficits. The latest issue will probably be the last until around October, Dresslar said.

Combined with a proposal by Brown for a temporary tax increase, the lack of new offerings has stoked demand after municipal-bond yields reached four-decade lows earlier this year. The rate on general-obligation debt rated Aa2 by Moody’s Investors Service and maturing in 20 years fell to 3.6 percent in the week ended Jan. 19, the lowest since April 1967, a Bond Buyer index shows. The index stood at 3.97 percent yesterday.

Market Loosening

“A lot of issuers have been coming to market,” AllianceBernstein’s Rosenblum said. “Supply is up so the market is opening up.”

Brown, a Democrat, has proposed erasing a $9 billion budget deficit partly by asking voters in November to raise income and sales taxes for several years. If the increase is rejected, his plan calls for $5 billion of automatic cuts midway through the fiscal year that begins July 1. Most would come from schools.

Some investors are waiting until after November before buying California debt, Bud Byrnes, president and chief executive officer of RH Investment Corp. in Encino, a part of Los Angeles, said yesterday by telephone.

“There is a huge pent-up demand, but the waters are still murky,” Byrnes said. “So far, only the hardier souls and professionals have waded in.”

Byrnes called it a “decent” sale. “Traditionally the week before taxes are due is not a good time to bring a bond sale,” he said.

The state’s financial condition remains precarious. March revenue trailed budget projections by 4.2 percent, missing the forecast by $233.5 million, according to Controller John Chiang.

To contact the reporters on this story: Alison Vekshin in San Francisco at avekshin@bloomberg.net; Michael B. Marois in Sacramento at mmarois@bloomberg.net; James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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