Regional News

Big Deal, Little Data

SAN FRANCISCO - With the deal slated to go before retail investors Tuesday, details remain scarce on the structure of California's planned $4 billion revenue anticipation note offering.

As of yesterday morning, no information was available on structure, ratings, or possible enhancements, said Tom Dresslar, spokesman for the state treasurer's office.

The state does have a pitchman, however - Gov. Arnold Schwarzenegger will appear in radio advertisements in the San Francisco and Los Angeles regions, Dresslar said, and there will be print advertisements as well.

California needs to sell $7 billion in Rans this year to meet its cash-flow requirements for the remainder of the fiscal year, though it plans to start with the initial $4 billion sale. The balance would be sold by spring.

California does need to borrow some money soon, as the controller's office is projecting that the state will have a negative cash balance by Oct. 29 if it doesn't.

The size of the deal could prove a challenge in short-term markets that have been all but ossified in the weeks after the Lehman Brothers bankruptcy and other events.

State officials say they are continuing to work on contingency plans should Rans prove difficult to market in the traditional manner - because of either the continuing crisis in the credit markets or issues regarding the quality of the credit itself.

But there have been some encouraging signs as the treasurer's office tries to lay the groundwork for the deal.

One possible harbinger was Massachusetts' success Wednesday in bringing $750 million of revenue anticipation notes to market.

Massachusetts had placed the deal on and off the competitive calendar at least twice before hiring Goldman, Sachs & Co. and Citi to manage the transaction as a negotiated deal. It priced the notes, which mature May 29, to yield 2.2%.

"Who knows in this market environment what's going to happen next week," Dresslar said. "But it was a hopeful sign in a torrent of bad news."

Another possible sign is that the torrent of money flowing out of tax-exempt money market funds - logical buyers for short term paper like California's - has abated this week, according to Connie Bugbee, managing editor of iMoneyNet.

The entire money market industry has seen across the board outflows after a major taxable money fund "broke the buck" in September.

"This week they actually had net inflow," Bugbee said of the tax-exempt money markets.

There are also many California-specific tax-free funds. "If all is well and the credit [rating] was there that would be one market for them," she said.

Goldman Sachs and Banc of America Securities are lead managers on California's Ran deal.

The two-day retail order period is slated to begin Tuesday, followed by final pricing Thursday and closing a week after that.

Retail did come through for California this week, taking 100% of a $97 million grant anticipation revenue vehicle deal in a retail order period Wednesday. JPMorgan priced the Garvee bonds to yield 2.37% for February 2009 maturities and up to 5.18% for 2020s.

Massachusetts had the advantage of top-tier short-term credit ratings as it went to market: MIG1 from Moody's Investors Service, SP-1-plus from Standard & Poor's, and F1-plus from Fitch Ratings. Those agencies assign California general obligation ratings of A1, A-plus, and A-plus, respectively.

Ratings for the California's Rans had not been released at press time, but some of the state's structural financial weaknesses appear glaring in the notes' preliminary official statement.

The state's current budget was adopted more than 12 weeks after the start of the fiscal year - a delay that in and of itself may have cost California the opportunity to access the market before the crisis environment developed.

According to the POS, state Department of Finance officials are estimating $4.6 billion in "cash pressures" that threaten to unbalance the $101.9 billion general fund spending plan that was adopted last month.

That includes a $3.5 billion shortfall in baseline tax receipts from the state's income, sales, and corporation taxes. For the first three months of fiscal 2009 alone, revenues from sales, income, and corporate taxes are already $1.1 billion below budget.

On the other hand, according to the POS, some of the fine-print details in this year's budget will give the state more access to special funds if it needs money to redeem the Rans next June.

The budget act, for example, frees up money in a fund connected with Proposition 63. The 2004 ballot measure added an income tax surcharge on those with $1 million-plus incomes to fund mental health services. Because of state and local governments' inability to implement programs to help mentally ill people, the Proposition 63 fund has $2.5 billion from which the state can borrow for cash-flow needs.

Between authorizations granted in the budget and administrative actions taken by the state controller, California has gained access to an additional $4 billion in borrowable special fund resources since May, the POS stated.

In the wake of the release of the POS for the note sale, Schwarzenegger and the partisan leaders of each house of the Legislature held a so-called "Big Five" meeting Wednesday, which included state Treasurer Bill Lockyer.

Lockyer briefed the governor and the lawmakers on the upcoming note sale, according to Assembly Speaker Karen Bass, D-Los Angeles. Rumors of a special session of the Legislature did not materialize, but they all promised to work together in the coming months.

"We did decide we would have weekly Big Five meetings so we will continue to be updated and come up with a response for what we would be doing way before January when the Legislature reconvenes," Bass said.



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