Anaheim Sells $22 Million in Debt at Low Rate as ‘Note Season’ Opens : Finance: But the first such sale in the wake of Orange County’s bankruptcy filing requires a $46,000 ‘insurance policy.’
The City of Anaheim successfully sold $22 million of insured one-year notes at a low-cost rate Tuesday, a signal that other California agencies--especially those in bankrupt Orange County--may be able to calm the fears of concerned investors this summer.
The closely watched sale marks the start of the annual ritual known as “note season” when schools, cities and the state sell more than $8 billion of short-term debt to meet operating costs until they receive taxes and other revenue later in the year.
After 13 firms offered to buy the notes Tuesday, Prudential Securities Inc. won the bonds with the lowest bid of 3.91%, a good rate for the Anaheim financing, traders said.
Still, in order to get that rate, the city had to purchase a $46,000 letter of credit--a form of insurance that nervous bond buyers now want from California agencies. Insiders said that without it, Anaheim may have paid as much as 6%--or would have had difficulty selling them at all.
“For the first penguin off the iceberg, they did OK,” said Stephen Kelleher, a bond trader at Sutro & Co., a San Francisco investment banking firm. “But Orange County’s problems are driving up borrowing costs not only for the Anaheims and Santa Anas, but for the Marins and everyone in the state. Buyers are scrutinizing these bond issues a lot more closely, and that takes time and money.”
Although the city got a low-cost rate, under which it will pay $862,000 in interest on the one-year debt, it had to pay $46,000 for a letter of credit, a type of insurance policy, from Union Bank of Switzerland.
Other California agencies that plan to sell notes this June are deciding whether to pay the added costs of insurance or let Wall Street penalize the bonds with high-cost pricing. Traders today are closely watching Marin County, which is expected to sell $37 million of notes without insurance. Also today, the Foothill-Eastern Transportation Corridor Agency will sell $1.35 billion of toll road bonds.
The added costs of guarantees for notes and market uncertainty prompted state Treasurer Matt Fong on Tuesday to create a special task force to review note sales and, in a salve for cash-strapped schools, to promise to look into legislation that would allow the state to provide added security on upcoming note sales by school districts.
In previous years, buyers attracted by the short-term maturity dates have typically scooped up the California notes at low borrowing rates. But Orange County’s Dec. 6 bankruptcy filing changed all that. Bond buyers, concerned that the county might not make good on notes it sold during 1994 and concerned about priority set-aside payments, are insisting on costly guarantees.
Some of the major mutual funds that buy the bulk of annual notes recently sent a letter to state politicians warning that fallout from Orange County’s decision could shake the note market in June.
