Regional News

DWR to See Bank Bonds

SAN FRANCISCO - The California Department of Water Resources will allow $350 million of variable-rate power revenue bonds to become bank bonds next week after failing to find buyers last week for a fixed-rate conversion.

The DWR planned to price $523 million of fixed-rate debt last Thursday, converting variable-rate bonds issued in 2005 into fixed rate. The deal included three series totaling $425 million for which letters of credit or liquidity agreements expire Dec. 1, plus another $98 million series for which the department chose to terminate the liquidity provisions.

The debt all originated from a massive 2002 bond transaction in which the DWR issued almost $11.3 billion to repay loans from private banks and the state general fund. The loans were used for the department to buy power during the state's 2001 and 2002 power crisis, when surging wholesale electricity prices outstripped the ability of the state's investor-owned utilities to pay them.

The power revenue bonds are secured with surcharges paid by customers of the state's three major investor-owned utilities.

Last week's deal, managed by JPMorgan, drew $152 million in retail orders Wednesday but institutional buyers were not there on Thursday, said Tom Dresslar, spokesman for the California treasurer's office.

"The institutional investor demand was close to nonexistent for the longer maturities the department offered (2020, 2021, and 2022), at least at yields that made financial sense for ratepayers," he said in an e-mail.

The deal was downsized to $173 million, with 2016 maturities yielding 4.35% and 2018 maturities yielding 4.7%.

"Even though the market appears to be getting back to normal, it isn't fully back to normal," said Chris Mier, a managing director and municipal strategist at Loop Capital Markets in Chicago. His firm wasn't part of the syndicate selling the deal.

"We don't have the breadth of the market in terms of participation," Mier said, citing a decline in tender-option bond funds, proprietary traders, and arbitrage accounts. "And you don't have the depth because there's not huge buying apart from perhaps retail and the investment managers who represent retail."

The bonds came with underlying ratings of Aa3 from Moody's Investors Service and A-plus from Fitch Ratings and Standard & Poor's, the latter the result of a one-notch upgrade Nov. 7.

The $173 million sale will allow the DWR to convert two series to fixed rate, one $75 million series with an expiring liquidity agreement, and a $98 million series with a liquidity agreement - with Morgan Stanley Bank - that the DWR chose to terminate.

The other two series become bank bonds upon termination next week of their letters of credit. That means they are subject to higher bank rates and, according to the official statement, an accelerated five-year maturity schedule.

A total of $575 million of debt had letters of credit or liquidity agreements that expired Dec. 1. If all of that debt had become bank bonds, the DWR's debt service costs would have increased $30 million in 2009 and $121 million annually thereafter, according to financial statements attached to the official statement.

Before last week, the DWR had already experienced problems remarketing variable-rate debt. It had about $60.8 million of bank bonds as of Nov. 2, according to the treasurer's office.

"Ratepayers can ill afford these kinds of additional burdens," Dresslar said Friday.

Andrew Ward contributed to this story.



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