Buyers Devour California’s Deficit Bonds
Investors were so hungry for California’s deficit bonds Wednesday that state officials said they could have sold nearly twice the $7.9 billion of securities that they marketed.
But Wall Street experts cautioned that the enthusiastic response to one of the biggest municipal bond offerings in U.S. history should not be taken as a sign that California’s fiscal crisis is over.
To the contrary, they stressed that Gov. Arnold Schwarzenegger and state lawmakers still must take action to shrink California’s chronic budget deficit if the state’s credit rating is to rebound from its rock-bottom standing among the states.
Proceeds from the sale of the deficit bonds, which range in maturity from one to 19 years, will let California refinance short-term borrowing that covered the state’s deficit spending in recent years.
Fund managers said investors had lined up to buy the first installment of a $15-billion fiscal recovery package approved by the voters March 2. The bonds are backed by a dedicated share of the state sales tax.
The governor, who campaigned hard for passage of Proposition 57, which permitted the borrowing, was delighted with the outcome of the bond sale, said state Finance Director Donna Arduin. “It tells us that the market has extreme confidence in California and where California is headed,” she said.
State Treasurer Phil Angelides, an outspoken opponent of the deficit bond issue when it was on the ballot, acknowledged that the sale went well. Demand for the tax-exempt bonds exceeded the supply by nearly $7 billion, he said.
“We should be pleased we had a successful sale, but there is much work to be done,” Angelides said. “It is imperative now that the budget be balanced, truly balanced, with no more borrowing and one-time fixes.”
The yields ranged from 1.33% for a one-year bond to 4.85% for a bond maturing in July 2023.
Angelides said the average interest rate on the financing was 4.03%. The dollar amount of interest was not available Wednesday. The bond underwriters were paid $39.5 million, and other costs, including bond counsel, added $3.4 million, the treasurer said.
To sell the bonds, California had to offer a higher yield compared with yields on higher-rated municipal securities. But the premium was not as much as the state recently had to offer.
General obligation bonds sold by the state two weeks ago carried a yield premium of 49 basis points compared with AAA-rated municipal debt, but that gap narrowed in Wednesday’s sale to between 18 and 29 basis points, depending on the bond. A basis point is one-hundredth of a percentage point.
Angelides said investors and rating agencies liked the fact that the bonds sold Wednesday would be repaid from a dedicated share of the sales tax.
“Wall Street is very confident in the economic viability of the state and this mirrors that confidence,” said Steven Permut, vice president and director of municipal bond investment at American Century Funds in Mountain View, Calif. He said there was a perception that the state’s economy had bottomed out.
Permut said Wall Street was hoping that Schwarzenegger and state legislators would adopt a budget that is balanced without the kind of borrowing seen in the last few years.
David Blair, senior analyst at Nuveen Investments, said the bond sale was a first step in restoring the state’s credit rating. Achieving a balanced budget is the next one, he said.
“This is a little patch, sort of a Band-Aid,” he said. “The real challenge is forging a compromise with the Legislature, developing a plan to shrink that [budget] gap through expenditure cuts or tax increases ... not through borrowing.”
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