By Michael B. Marois - Apr 11, 2012 12:01 PM GMT+0800
Article from Bloomberg
California (STOCA1), poised for its first credit upgrade by Standard & Poor’s since 2006, is selling $1.3 billion of debt with its relative borrowing cost at the lowest point in more than three years.
California yesterday took orders for bonds maturing in 10 years with a preliminary yield of 2.82 percent, or 58 basis points more than top-rated securities, the smallest spread to AAA rated debt since November 2008, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
S&P, which puts California’s general obligations at A-, its fourth-lowest investment grade and the worst ranking for any state, in February changed its credit outlook to positive after Governor Jerry Brown, 74, and lawmakers took steps to ease a looming cash shortfall and cut the $20 billion annual structural deficit by three quarters.
“They’re definitely getting a better acceptance right now, just given that they’ve taken some positive steps over the last year,” said Daniel Solender, who manages more than $15 billion of municipal securities at Lord Abbett & Co. in Jersey City, New Jersey. “The deficits looking forward, while still sizeable, aren’t as big as they were.”
Treasurer Bill Lockyer is selling $890 million of general- obligation bonds for public works and $410 million to refund debt. He’ll seek bids from individuals again today before final pricing with institutions such as mutual funds tomorrow. He offered 30-year maturities yesterday at 4.45 percent, or 77 basis points more than top-rated securities.
Lower Volume
Brokers took orders for 25 percent of the debt during the first day of sales, Lockyer said. By comparison, 38 percent was sold on the first day of a $2 billion offering last month.
California has reduced the amount of general-obligation bonds it sells to the smallest two-year total since 2006 as lawmakers work to erase budget deficits. The latest sale will probably be the state’s last until around October, Tom Dresslar, a Lockyer spokesman, has said.
Combined with Brown’s proposal to raise income taxes, the lack of new offerings has stoked demand after municipal-bond yields reached four-decade lows earlier this year. The rate on general-obligation debt maturing in 20 years fell to 3.6 percent in the week ended Jan. 19, the lowest since April 1967, a Bond Buyer index shows. The index climbed to 4.08 percent last week.
Cooling Interest
The narrowing difference between California bonds compared with top-rated debt has cooled interest among some investors.
“We did see the deal and perceived it as narrow and so we declined it,” said Josh Gonze, co-manager of the $297 million Thornburg California Limited-Term Municipal Fund in Santa Fe, New Mexico. “But other investors will approve of it and say yes. So they will get the deal sold, but they won’t be able to sell any to Thornburg because we want to see more spread for this credit.”
Brown, a Democrat, has proposed erasing a $9 billion budget deficit partly by asking voters to temporarily raise income and sales taxes at the ballot box in November. If that fails, his plan calls for $5 billion of automatic cuts midway through fiscal 2012, which begins July 1. Most would come from schools.
The state’s fiscal condition remains precarious. March revenue trailed budget projections by 4.2 percent, missing the forecast by $233.5 million, according to Controller John Chiang.
To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net
To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net
Article from Bloomberg