State Offers Details on Electricity Bond Issue
Wall Street received more details Thursday on the state’s planned mammoth electricity bond issue as state officials held a private conference call with big investors--a move designed to boost interest in the bonds and address concerns about the state’s financial condition.
The call was the first in what is expected to be a long summer promotional campaign by state officials to cultivate Wall Street interest in the municipal bond deal, the largest ever sold. The state is authorized to sell up to $13.4 billion of bonds in mid-August to help finance the state’s plan to overcome the energy crisis. Proceeds will buy more electricity and pay back the general fund for purchases already made.
Managers of large municipal bond funds, bond-rating officials and Wall Street analysts who joined the conference call with state Treasurer Phil Angelides said although many details remain to be revealed, what they heard Thursday was encouraging.
Buyers were told the amount of bonds expected be sold is about $12.5 billion, slightly lower than the $13.4 billion anticipated, with about $8 billion of the bonds sold as tax-exempt securities. The bonds could be sold in a lump sum, buyers were told, and the longest term will be a 15-year maturity instead of the 20- and 30-year maturities common in the municipal market.
“To date, one of the main complaints we’ve had has been lack of information, so in that respect [the call] was helpful,” said Steve Permut, managing director of municipal research with American Century Investment Management, a mutual fund firm in Mountain View, Calif.
However, Steve Galiani, managing director of the municipal bond department for Wells Fargo Capital Management in San Francisco, believed the state was trying to put a good face on a bad situation.
“I thought they were presenting a very rosy picture. There were hard questions that were not asked,” Galiani said. “Certainly, they’ve got to sell the bonds, so their job is to paint as rosy a picture as they can.”
Indeed, the state is attempting to sell the bonds as demand for California’s debt among investors has dropped to new lows and bond-rating agencies have lowered ratings on the state’s securities, a warning signal for investors.
In an attempt to appeal to a wider range of investors, the issue will be sold as a mixture of taxable and tax-exempt securities. The state expects roughly $8 billion of the record bond issue to be sold as tax-exempt securities and the rest, about $4.5 billion, will be taxable, investors said.
Buyers in California who purchase tax-exempt securities do not pay state and federal taxes on the interest, making them especially attractive investments for the state’s residents. The taxable securities are expected to be sold with higher yields, making them more costly for the state to issue but more attractive to investors from throughout the country.
In an interview Thursday after the call, Angelides said that with an issue of such size, he would have to reach out to national and even international investors, but he expected most interest to come from California.
“We want to cast as wide a net as possible,” he said, “but understand that the people that are most likely to take advantage of this--those that receive the dual tax benefits, state and federal--are here in California.”
Though he initially had planned a series of staggered issues amounting to the total, Angelides said that is now “up in the air” and the state may seek one large block of financing for the $12.5 billion. Angelides stressed that the structure he described Thursday is not set in stone.
Maturities on the bonds are expected to range from one year to as long as 15 years, disappointing some managers who had hoped to lock in what are expected to be high yields for 30 years. Longer maturities, however, cost California taxpayers more in interest, and Angelides said there were legal hurdles as well because the bonds had to mirror the life of the state’s involvement in the electricity market to qualify for the tax exemption.
“The shorter maturities, I understand, are better for the state, but it’s going to put more pressure on the market to get the bonds sold,” American Century’s Permut said. “Still, events are changing so quickly, this is just a snapshot in time of how things look today.”
Other big questions that remain to be answered include how much of the issue will have private bond insurance, which makes the bonds a much less risky bet for investors, and how many bonds will have a variable interest rate instead of a fixed one.
Other questions center on how secure the revenues ticketed for repaying the bonds will be.
The bonds will be sold by the California Department of Water Resources, the agency making emergency purchases of electricity for the state’s private utilities as a result of the energy crisis. They are considered revenue bonds since they are backed by payments from electric bills paid by consumers. The bonds are not general obligation bonds and are not backed by the “full faith and credit” of the state of California.
Proceeds from the bond issue would help repay about $6 billion to the state’s general fund that was used to buy electricity on behalf of the state’s utilities. Other proceeds would be used to buy more electricity later this year.
Angelides said he is not required by law to do so, but he expects to issue a detailed “preliminary official statement” outlining terms of the bonds by the third week of July to appease investors in anticipation of a sale in mid-August.
Rating agencies and bond insurance firms also are expected to scrutinize the bonds in July, deciding whether to give ratings or provide bond insurance.
Several of the bond buyers said after the 90-minute conference call that they are still planning to buy if the bonds are packaged attractively.
