State’s Energy Bond Sale Faces Delays, Skepticism
State Treasurer Phil Angelides and a delegation of finance officials sought to reassure Wall Street on Thursday that California’s $12.5-billion energy bond sale is on track, despite repeated delays and continued questions about the safety of the securities.
On a trip to New York this week, Angelides met with bond-rating officials and managers of large mutual funds to tout the securities. Lower power costs and an 11% drop in statewide energy use in May and June have reduced volatility in the energy market and should make investors feel more comfortable about the bonds’ long-term safety, he said.
“This ball is moving forward toward issuance,” Angelides said during a conference call with investors Thursday. “Of course we have a long way to go before we close this transaction.”
However, potential investors questioned why the deal now is being delayed until late October and whether the state’s utilities will agree with certain stipulations in electric rate contracts.
“The issues that concerned us six weeks ago are still outstanding,” said Steve Permut, a manager at American Century Investments in Mountain View, Calif., with about $2.5 billion of California municipal bonds under management.
Proceeds from the bond deal--estimated to be the largest in U.S. history--would reimburse the state’s general fund for the roughly $8 billion it spent to purchase electricity for strapped utilities when power costs skyrocketed last year and early this year. The power crisis pushed PG&E; Corp.’s Pacific Gas & Electric utility into bankruptcy and has threatened the financial survival of Southern California Edison as well.
Bond proceeds also would be used to pay back a $4.3-billion “bridge” loan the state arranged with a group of banks in June.
Some investors remain skeptical the state can arrange a legal structure to ensure the safety of the bonds. That’s because the California Public Utilities Commission still must put in place a rate agreement and approve four other contracts at an Aug. 23 meeting to help protect the revenues earmarked to repay the bonds from potential challenges in U.S. Bankruptcy Court.
Plans call for the bonds to be repaid with a specified portion of future rates collected from the state’s utility customers. But some investors fear the utilities might balk at the terms.
After Aug. 23, there is a 30-day period when legal challenges can be mounted against the contracts. Some money managers predicted the state would work overtime to negotiate agreements to ward off lawsuits. Still, if suits are filed, it could push the bond sale into November.
That could be costly for the state. If the bonds aren’t sold by the end of October, the interest rate on the state’s $4.3-billion bridge loan jumps to 7% from about 4.1%.
Overall, investors said excitement about the mammoth bond issue is waning each time the state delays the sale. “The more it gets pushed back, the more difficult it becomes,” said Dan Solender, a principal at Vanguard Funds in Malvern, Pa., with about $4 billion of California tax-exempt bonds under management.
Another issue looming is whether there might be a glut in the municipal bond market if the New York Metro Transit Authority follows through on plans to refinance $14 billion of its debt this year or early next. So many new bonds flooding the market might boost the interest costs of California’s deal.
“Investors only have so much money to spend in a given day, so if the two deals are sold close together, it will drive up the interest costs California will have to pay,” said Zane Mann, publisher of the California Municipal Bond Advisor newsletter in Palm Springs. “I can’t imagine the underwriters wouldn’t try to control that.”
