State courts individual investors for bond sale
California plans to sell $4 billion in tax-free bonds next week to fund infrastructure projects, and the state is hoping for robust demand from individual investors.
The offering is expected to be a big test of California’s standing in financial markets amid a still-precarious budget situation. The last state bond sale was in June.
On Thursday, credit rating firms Moody’s Investors Service and Fitch Ratings cut their ratings on the state’s debt, matching a move by rival Standard & Poor’s last month. California now has the lowest grade of any state.
Moody’s reduced its rating to A2 from A1; Fitch trimmed its rating to A from A-plus. Most states are rated either AA or AAA.
The latest cuts weren’t a surprise. In a statement, Fitch said that “despite recent major [budget] balancing actions, the downgrade reflects . . . Fitch’s expectation that the state will experience continued budgetary and cash flow stress.”
Still, the appeal of the state’s so-called general obligation bonds is that principal and interest repayment is mandated by California’s constitution, offering strong protection against default.
Treasurer Bill Lockyer is actively courting individual investors via print and radio ads for the bonds, which will be sold in maturities from one year to 30 years.
The state, via brokerages, will take individuals’ orders for the securities Monday and Tuesday. Institutional investors then will bid Wednesday, which is when interest rates on the bonds will be set.
Market estimates of what the bonds might pay range from about 4% on the five-year securities to 5% on the 10-year issue and 6% on the 30-year issue. Because interest on the bonds is exempt from state and federal income taxes for California residents, those yields should be attractive to many income-hungry individual investors, analysts say.
Some investors “have been sitting on the sidelines waiting for this deal,” said Joe Gotelli, a bond fund manager at American Century Investments.
The bonds will be sold in minimum lots of $5,000. Individual investors must order via a brokerage; the state doesn’t sell bonds directly to investors. More information is at Lockyer’s website, buycaliforniabonds.com.