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California Switches Up

SAN FRANCISCO - California converted the enhancement for its commercial paper program to a standby letter of credit from a standby note purchase agreement, effective yesterday.

The change was made to address soaring interest rates on the commercial paper program, which provides initial financing for projects funded by general obligation bonds, said Tom Dresslar, spokesman for Treasurer Bill Lockyer.

"Rates were going up pretty substantially for a while," Dresslar said. On July 2, for example, the rate for seven-day paper hit 8.12%, he said, up from 3.37% a month earlier.

"Our folks in public finance said the response was really positive today," Dresslar said of the conversion.

The state will pay about 20 basis points more for the LOC compared to the old standby purchase agreement, Dresslar said. Detailed figures on the actual costs were not immediately available.

The program is authorized to have up to $2 billion outstanding at any one time and currently totals about $1.3 billion.

The LOC agreement is with the same eight institutions that provided the standby purchase agreement: Royal Bank of Canada, Dexia Credit Local, Wells Fargo Bank NA, the California Public Employees' Retirement System, Calyon, the California State Teachers' Retirement System, Landesbank Hessen-Thueringen Girozentrale and Bayerische Landesbank.

The letter of credit substitution prompted Moody's Investors Service yesterday to remove from negative watch its P-1 rating for the commercial paper program.

Standard & Poor's, on the other hand, on Tuesday affirmed its A1 rating for the GO commercial paper program, but kept it on negative credit watch.

"In our opinion, potential for credit concern around the CP relates to the state's severely diminished cash liquidity, which we believe is insufficient for all its payment obligations as lawmakers and the governor continue to deliberate over how to close a $25.2 billion budget shortfall for fiscal 2010 (not including funding the governor's proposed $1.1 billion reserve)," the Standard & Poor's report said.

Fitch Ratings yesterday confirmed its F1-plus rating on the commercial paper program.

The state's long-term GO bond ratings are A from Standard & Poor's, Baa1 from Moody's, and BBB from Fitch.

The budget negotiations picked up pace over the weekend and were scheduled to resume again yesterday afternoon with another meeting of Gov. Arnold Schwarzenegger and the four top-ranked lawmakers.

Before the meeting, Schwarzenegger said the atmosphere at the so-called Big Five meetings has been constructive.

"I think that we have a good shot at getting the budget done today," he said. "But I have to caution that there still are some important things that need to be solved."

Because of California's continuing budget stalemate and related cash crunch, Controller John Chiang has been paying some of the state's creditors with IOUs since July 2.

Several large banks have ceased accepting the IOUs, formally known as registered warrants, and the Municipal Securities Rulemaking Board and the Securities and Exchanged Commission have warned that securities laws apply to their sale.

Yesterday, SecondMarket, which describes itself as a "marketplace for illiquid assets," said it had opened a market to bring buyers and sellers of the IOUs together.

"With several major banks no longer redeeming California IOUs, and with some citizens, businesses and municipalities needing liquidity, we felt it was important to launch this market promptly," SecondMarket chief executive officer Barry E. Silbert said in a statement.

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