State Notes Find Eager Buyers
California successfully sold $3 billion in short-term notes to a hungry investing public Tuesday, as a major credit-rating service boosted the Golden State’s credit rating.
The state’s offering of 11-month revenue anticipation notes, part of an annual financing that tides the state’s coffers over while awaiting taxes to be paid during the fiscal year, saw robust demand from individual investors.
The $3-billion sale included $2.15 billion of fixed-rate notes yielding an annualized 3.92%. Lehman Bros., the lead underwriter on the deal, was able to lower that yield from an initial 3.95% thanks to strong demand.
Individual investors bid for about $1.2 billion of the notes, up from an expected $1 billion.
“We did very well with [the deal]” in terms of individual investor interest, said Peter Auzers, bond trader at Fidelity Investments’ discount brokerage arm in Los Angeles.
Because the interest paid by the state is free from both federal and state income tax, it is a particularly lucrative yield for investors in high tax brackets.
The remainder of the deal consisted of variable-rate notes.
Tuesday’s sale was the last leg of a record $7-billion financing program that California is using to get its finances in order as it recovers from the harsh recession of the early 1990s.
The state’s recovery has been strong enough for credit-rating service Standard & Poor’s Corp. to decide that California’s debt rating should be raised.
S&P; on Tuesday boosted its rating on California’s outstanding long-term general obligation bonds to A+ from A, citing the state’s improving economy.
Higher credit ratings usually lower borrowing costs for states and municipalities when they sell new debt. Although the upgrade on the bonds didn’t affect what were already top “SP1+/A-1+” ratings on the short-term notes, it could help bolster investor expectations that the state’s finances will remain strong.
“It’s certainly a plus,” said Pam Tynan, who manages about $7 billion in notes for the Vanguard Group in Valley Forge, Pa.
Still, some analysts noted that S&P;’s rating change simply brings it in line with that of archrival Moody’s Investors Service. Moody’s has rated the state A1 since July 1994, when the rating was cut from AA. A Moody’s A1 rating is equivalent to an S&P; A+ rating.
California still is four notches below the highest possible credit rating of AAA, which it enjoyed in the late 1980s.
The state’s jobless rate fell to 7.1% in June, down from a peak of 9.7% during the recession and the lowest since January 1991.
With employment growing again and its economy improving, the state was able to eliminate the cumulative budget deficit that had been rolled over annually through debt sales.
Elimination of borrowing across fiscal years was among the reasons cited by S&P; for the ratings upgrade. S&P; also took into account the state’s more realistic budget assumptions and anticipated continued positive operating performance.
The California note sale represents the year’s biggest financing in the municipal debt market.
The state’s timing may turn out to be quite good: If economic reports due later this week suggest a strengthening U.S. economy, financial markets are likely to decide that the Federal Reserve Board will raise short-term rates soon, boosting interest rates across the board.
What’s more, the Treasury is expected to sell 10- and 30-year bonds next week, and that supply could also put upward pressure on market interest rates.
