April 12, 2012, 11:24 a.m. ET
Article from The Wall Street Journal
By Kelly Nolan
Of DOW JONES NEWSWIRES
California hiked yields on some parts of its $1.3 billion bond offering Thursday, after it saw weakened demand Wednesday from individual investors.
A preliminary pricing for institutional buyers Thursday showed the state increased yields on some maturities 0.02 to 0.06 percentage point from an earlier pricing for individual investors. Bonds maturing around 10 years saw yields go up the most; a nine-year maturity offered a 2.62% yield Wednesday and 2.68% on Thursday's initial pricing. The state will set final prices later this afternoon.
California saw decent demand from individual, or "retail," investors Tuesday and Wednesday, as those buyers placed orders for nearly a third, or $418.9 million, of the deal, according to the state treasurer's office. However, the pace of orders Wednesday slowed to around $90 million, compared to $329 million Tuesday.
That means roughly $882 million bonds must still be sold to institutional investors Thursday.
California has sold a "decent" amount of bonds, "but they have a lot more to go," said Dan Solender, director of municipal bond management at investment firm Lord Abbett in Jersey City, N.J.
He noted that because the state had just sold $2 billion in debt last month, a lot of California bonds were trading in the secondary market at yields that weren't "much different" from what's being offered in this week's bond sale. Solender declined to comment on whether his firm participated in the deal.
While it offered the biggest muni bond deal this week, California also faced a lot of competition. Analysts at Janney Montgomery Scott estimated there could be as much as $10 billion in new muni debt selling this week. Muni deals have generally done well, but those that offer the highest yields have done best. For instance, despite economic woes associated with the island commonwealth, Puerto Rico Electric Power Authority increased its bond sale 35% to $650 million Tuesday to meet demand.
Some market participants noted that even though California just sold $2 billion in debt recently, the state is still issuing less debt than it has in years past. This week's bond sale is part of about $5.2 billion of general-obligation bonds California plans to sell in 2012, according to the state treasurer's office. In 2010, California issued $10.4 billion in GO bonds, while in 2009, it issued $20.4 billion.
"It's not the tsunami that the market is used to," said Matt Dalton, chief executive of Belle Haven Investments in White Plains, N.Y. Dalton said his firm didn't buy any California debt though, because the yields weren't appealing enough.
Others noted that the perception of California's credit, or its ability to repay debt, has brightened. The state still faces its share of financial difficulties, and it recently completed a short-term borrowing to help stave off a cash crunch. But its projected budget deficit in January for fiscal 2013 was about $9 billion, compared to prior fiscal years, where its exceeded $20 billion.
California's revenues are also up year-over-year, said Dan Genter, chief executive of RNC Genter Capital Management in Los Angeles, which participated in the deal. "We view this as an improving credit."
Even so, California is among the lowest-rated U.S. states. S&P and Fitch Ratings give it an A-minus--the seventh highest of 10 investment-grade ratings--and Moody's Investors Service considers it A1, in the middle of its investment-grade ratings. Proceeds from this week's bond sale will be used both for refunding old debt at lower rates as well as for new infrastructure projects.
- By Kelly Nolan; Dow Jones Newswires; 615-679-9299; kelly.nolan@dowjones.com
Article from The Wall Street Journal