Investors Get Look at Power Bond Deal

Potential investors in the California power bond deal--the biggest sale of municipal bonds in U.S. history--on Thursday got their first detailed look at the securities in a 362-page prospectus issued by state Treasurer Phil Angelides.

Institutional investors gave mixed reviews about the appeal of the bonds relative to the risks involved. But some financial advisors said California individual investors hungry for yield may flock to the securities. Most of the bonds will pay interest that is exempt from state and federal income tax.

The $11.9-billion financing, more than a year late because of repeated delays from legal challenges and political wrangling, will help repay the state’s general fund and commercial banks for financing the purchase of electricity during the state’s power crisis in 2001.

Angelides said Thursday that he would be meeting with investors in seven cities including New York, San Francisco and Los Angeles beginning Oct. 11 to explain the deal.

The bonds are “supported by substantial protections, statutory protections and substantial reserves,” Angelides said in a pitch to garner the lowest yields possible for the state.

“There is a structure here that is rational, and it’s clear what some of the risks are,” said Dan Solender, portfolio manager of about $5 billion in California municipal bonds for mutual fund giant Vanguard Group. Even so, he said, “we haven’t decided yet” on bidding for the bonds.

A key question, according to many institutional investors, is what happens if the state stays in the power-buying business and there is another emergency similar to the winter of 2000-01, when California was short of energy and its major utilities were financially unable to buy power.

Money to pay interest on the bonds and to ultimately retire the securities will come from a surcharge that customers of Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric will pay each month.

The state also plans to hold $1.8 billion from the offering in reserve to back the bonds. But some investors fear that those reserves could be quickly drained if the state must resume buying power.

“The biggest risk I see is that the state is still susceptible to the power market, which is to a great degree beyond their control,” said Linda Brisson, a research analyst with mutual fund firm T. Rowe Price Associates. “There is a lot to handle here, a lot to absorb. These are complex issues.”

Despite the concerns, California individual investors are expected to be hungry for the securities, given the alternatives--including a stock market that continues to slide and Treasury bond yields that are at 40-year lows.

About $5 billion of adjustable-rate power bonds are expected to be sold the week of Oct. 21 by the state Department of Water Resources, the agency that bought power during the energy crunch. The balance of the $11.9-billion offering will be sold afterward.

Large Wall Street investors are expected to purchase most of the adjustable-rate bonds. Individual investors are expected to be a key audience for the fixed-rate bonds expected to be sold in November with maturities ranging from two years to 20 years and in increments as small as $5,000, said Zane Mann, publisher of the California Municipal Bond Advisor newsletter in Palm Springs.

“Despite all that’s gone on with these bonds, they are a hell of a deal” if the yields come in as expected, Mann said.

Last week, three major credit-rating firms assigned the power bonds investment-grade ratings, though the grades of A-minus and BBB-plus are below the highest possible ratings.

Recent average market interest rates on 20-year munis rated A-minus have been in the 5% to 5.5% range. That contrasts with the current yield of 3.69% on a 10-year Treasury note and 4.73% on 30-year Treasury bonds.

What’s more, because the power bond interest is tax-exempt, the true yield will be much higher, depending on an investor’s tax bracket.

Still, the power bonds will be competing with a flood of other California securities expected in the next few weeks, including as much as $12 billion in short-term notes and $1 billion in general obligation bonds.

Investors can get more information about the power bonds at the state treasurer’s Web site: www.treasurer.ca.gov.