State Sells $4 Billion in Bonds--Most With Backing of Banks

Cash-strapped California successfully floated $4 billion in short-term debt Wednesday, but the state was forced to offer most of the securities with a costly bank guarantee of repayment.

The short-term bonds, maturing in April, 1996, were purchased by major Wall Street brokerages that will resell them to institutional and individual investors.

In a novel approach, the state allowed brokerages to bid for the so-called revenue anticipation warrants, or RAWs, in two series: One, at a lower yield, would be guaranteed (for repayment) by a syndicate of major banks; the other would pay a higher yield but wouldn’t carry a bank guarantee.

In the final tally, the state sold $3.9 billion of the RAWs with guarantees, and only $100 million of those without guarantees. The results indicated that the yields most bidders required on the non-guaranteed RAWs exceeded the state’s cost of issuing guaranteed paper, even with the fees it is paying banks.

“It’s a nice comment on the state,” one Los Angeles bond trader said sarcastically, noting Wall Street’s growing concern about California’s fiscal health and its ability to pay its debts.

State Controller Gray Davis, a Democrat who has lambasted Republican Gov. Pete Wilson’s 1994 budget and the resulting cash crunch that necessitated the RAW sale, said that without the bank guarantees “it probably would not have been possible to sell” the full $4 billion in RAWs.

Traders said the guaranteed RAWs were priced to yield an annualized 4.8%. That is exempt from federal and state income taxes so the true return is significantly higher than 4.8%, depending on the investor’s tax bracket.