March 31, 2010 / 8:38 PM / 10 years ago

Demand solid for quick California GO sale

SAN FRANCISCO (Reuters) - Should California’s treasurer put more state general obligation debt up for sale in April, he would have no problem selling it — even as the U.S. municipal debt market awaits a better view of the state’s troubled financial landscape.

Governor Arnold Schwarzenegger is putting together his “May revise,” an updated spending plan due soon that will give new details on state revenue to guide final budget talks with lawmakers. Meanwhile, State Treasurer Bill Lockyer is mulling whether to put about $1 billion in GO bonds out to market ahead of the revised budget plan’s “blackout” period.

Lockyer spokesman Tom Dresslar said the sale, if it proceeds, would round out plans in the treasurer’s office to sell about $7 billion of GO debt in the first half of the year.

Lockyer’s office sold nearly $6 billion of tax-exempt and taxable GO debt in two sales this month marked by torrid demand, so analysts expect another $1 billion of the bonds in very near term would be eagerly snapped even with investors fully aware of the $20 billion budget gap facing the state and lengthy partisan wrangling in the legislature over balancing the state’s books all but certain.

“There seems to be adequate demand to absorb California paper,” said Dick Larkin, director of credit analysis at Herbert J. Sims Co Inc in Iselin, New Jersey.

That in part reflects the fat yields California, which has the lowest credit rating of any state, is paying on its GO debt — 1.17 percent for the 2012 maturity to 5.65 percent for the 2040 maturity of its $2.5 billion tax-exempt GOs sold earlier this month.

“Investors know there are some tough decisions that still need to be made ... (but) people are looking for yield and this is one of the states that’s providing pretty good yield,” said David Blair, a credit analyst at PIMCO, which oversees $27 billion in municipal bonds.


Investors are also gaining confidence California will not repeat its cash crunch of last year, brought on by weakening revenue. The state’s coffers grew so thin it was forced to temporarily issue IOUs in lieu of some payments.

“It’s really not as much a revenue issue as it was a year ago,” Blair said, noting California’s revenue reports have indicated gains of late. “You’re likely to see modest increases going forward.”

Investors have also scooped up California GO bonds lately because of rising confidence in their security.

Even as California was issuing IOUs last year, its finance officials stressed the state would make its debt service payments come hell or high water, and it did because paying bondholders is one of its top priorities — by law.

Lockyer religiously makes that point any way he can. For instance, this week he sent a letter to six big banks that underwrite California’s bond sales, asking what their role may be in also selling credit default swaps on the debt. His stock defense of California opened for his information request.

“The State never has defaulted on a debt service payment in its history,” Lockyer said. “Small wonder ... Under the state Constitution, debt service has second call on General Fund revenues, right behind schools.”

“There’s more,” Lockyer added. “GO debt service payments are continuously appropriated. In plain English, that means debt service gets paid even if the State has no budget.”

The pundit chatter of last year of California defaulting or, worse, declaring bankruptcy has been disregarded, said Mitchell Savader of Savader Asset Advisors in New York: “When push comes to shove and cuts have to be made or the budget gap needs to be closed, there are many other options that would come before nonpayment of debt service.”

Investors have fully bought into that so they would jump on $1 billion of California GO debt if Lockyer opts for a quick sale, said Matt Dalton of Belle Haven Investments in White Plains, New York, which oversees $400 million in muni bonds: “No problem ... The fear of California missing a debt payment or anything bad happening is just becoming a distant thought.”

Editing by Kenneth Barry

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