Energy Issue Could Spur Bond Glut
The mammoth electricity-bond sale California plans for this summer already has many investors lining up.
Financial advisors are telling clients to have cash ready for the bond deal, which isn’t expected before August. Managers of multibillion-dollar bond funds nationwide likewise are making plans to get a piece of the deal.
But investors’ decisions to set aside funds for the expected $12.5-billion offering also could mean trouble for other state and local entities that want to raise cash via municipal bond offerings this summer.
The risk: Other issuers could be crowded out of the market--or be forced to pay sharply higher yields on their bonds.
The state also is creating competition for itself. Treasurer Phil Angelides expects to sell $1 billion in general obligation debt June 12. The state also may sell $1 billion to $3 billion in short-term debt, called revenue anticipation notes, this summer.
Angelides on Thursday downplayed worries about a bond glut. “It’s a big marketplace, a $200-billion-plus market in any given year,” he said, referring to muni issuance nationwide.
Even so, he said, “it’s important for all issuers and for us to plan [bond] issuance around the energy bonds. We hope to lock down a schedule for sale of these bonds very soon.”
State officials have been working in recent weeks to cultivate Wall Street interest in the electricity bond deal, the largest municipal deal ever.
The state is authorized to sell as much as $13.4 billion in bonds to help finance its plan to overcome the electricity crisis. Proceeds will buy power and pay back the general fund for purchases already made.
Though the yields on the bonds have yet to be determined, the tax-free securities in the offering could pay between 4% and 6.5%, depending on maturity, analysts say. For investors in the highest tax brackets that could mean yields equivalent to 9% or more on fully taxable bank CDs.
Also, about $4.5 billion of the offering will be in the form of taxable bonds--a move aimed at drawing investors nationwide.
The electricity bonds won’t be backed by the full faith and credit of the state, but many big investors see relative safety in the sheer size of the deal--and in yields expected to be handsome relative to other bonds.
“I want to make sure I have the capacity to buy this deal,” said Mary Miller, manager of more than $7.5 billion in California muni bond funds for mutual fund giant T. Rowe Price Associates.
Zane Mann, publisher of the California Municipal Bond Advisor, which advises wealthy investors who typically buy muni bonds, is telling clients to save their money for the electricity bonds--and pass on other deals until then.
“Investors will be standing in line to get their hands on those power bonds,” Mann said.
Some money managers say that, despite investors’ anticipation of the energy bonds, there should be enough demand to accommodate other California muni issuers.
Dave MacEwen, a bond manager with American Century Investments in Mountain View, believes there will be plenty of demand for municipal securities by individuals this summer, given the quality of deals and ongoing volatility in the stock market.
“There’s a tremendous amount of retail activity in the muni bond market right now, and there are still two months until the energy deal,” he said.
Indeed, $250 million in bonds issued by the East Bay Municipal Utility District sold Thursday amid strong retail demand, traders said.
In Oakland, Romi Selfaison, controller for the Oakland Unified School District, is more worried about the district’s ballooning energy costs this summer than the planned sale of $101 million in bonds this month.
“We’re not worried about who will buy these bonds or if they will sell. Our district is highly rated and we know they will sell,” he said.
MacEwen said that, with a number of older muni bonds maturing on July 1, as well as semiannual interest payments made on that date on existing bonds, he expects to have plenty of cash reserves to buy the energy bonds.
If not, he said, he can sell other bonds in his portfolio to raise cash if the energy deal is worth it.
But dumping of other bonds could depress their prices. That would hurt share values of popular California muni bond mutual funds.
“I don’t want to be in the position of selling [other] bonds” to buy the power bonds, T. Rowe Price’s Miller said.
One positive sign for the muni market: Yields have stabilized on California general obligation bonds in recent weeks, after surging in April in part on concerns about the state’s fiscal health.
Overall, the supply of California bonds is up from last year, though not back to the record issuance of the mid-1990s.
So far this year, California and its entities have sold $12.8 billion in bonds in 341 deals, compared with 277 issues totaling $8.2 billion as of May 30 in 2000, according to Thomson Financial.
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California Yields Stabilize
Yields on California municipal bonds surged in April amid growing concern on Wall Street about the state’s fiscal health. But yields have stabilized in recent weeks.
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20-year California general obligation bond average yields, weekly closes and latest:
Thursday: 5.28%
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Source: Bloomberg News
