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Small Investors Grab State Power Bonds

From Times Staff and Wire Reports

Yield-hungry individual investors have put in orders to buy nearly one-quarter of the tax-exempt power bonds the state will sell today, underwriters said Monday.

But some of the institutional investors who are expected to buy the balance of the bonds said the securities’ yields may have to go higher to make them worth taking.

The $6.5-billion, fixed-rate bond issue by the Department of Water Resources is the second and final phase of the biggest municipal bond offering in history.

Proceeds from the bonds will be used to repay loans that the state took on to buy power during the energy crisis of 2000 and 2001.

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The state invited small investors to place orders for the securities on Friday and Monday, ahead of institutional orders.

Through Monday afternoon underwriters had taken in orders totaling $1.5 billion from individual investors, according to J.P. Morgan Chase & Co., the deal’s lead underwriter.

A J.P. Morgan spokeswoman in San Francisco said the underwriters and the state were “quite pleased” with the demand shown by individuals.

The bonds, to be sold in maturities ranging from 2 1/2 years to 20 years, will pay interest that is exempt from state and federal income tax for California residents.

Because yields on U.S. Treasury securities and other high-quality bonds are near generational lows, many investors who need income have been eagerly anticipating the power bonds, analysts said.

On Friday, underwriters quoted an annualized yield of 4.44% for the 10-year uninsured portion of the offering. For an investor in the 34% combined federal and state marginal tax bracket, that yield would be equivalent to 6.7% on a fully taxable investment, such as a bank savings certificate.

The state’s offering will include uninsured and insured bonds. An insured bond is guaranteed against the possibility of default by private insurance the state purchases for the securities.

However, that assurance comes with a price: Yields on insured bonds usually are substantially lower than yields on uninsured securities.

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The power bonds aren’t direct obligations of the state. They are to be repaid by surcharges on the electric bills of the state’s major utilities.

Some big investors said Monday that, given the political and other risks that could dog the bonds in the long run, the state may have to offer higher yields to lure buyers for the remaining three-quarters of the offering today.

“It’s a complicated credit that presents more risks than a lot of other credits in the marketplace, and investors should be compensated for accepting these risks,” said Gary Pollack, a municipal bond principal with Deutsche Private Banking in New York.

Pollack said he thinks yields should be as much as one-tenth of a point higher than what underwriters were quoting Friday.

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But other analysts said demand from insurance companies and mutual funds probably will be strong, which could keep yields near Friday’s estimates.

If the final yields on the bonds come in lower than what underwriters quoted to small investors on Friday, individual investors will have the right to cancel their orders.


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