SAN FRANCISCO - California got good news from Wall Street yesterday: JPMorgan agreed to lend the state $1.5 billion to pay off IOUs issued during a cash-flow crisis this summer, and Standard & Poor's removed the state's bonds from CreditWatch.
Neither JPMorgan nor a spokesman for California Treasurer Bill Lockyer would release the precise terms of the loan yesterday, but both sides confirmed that the deal had been reached. The biggest U.S. state needs to borrow $10.5 billion to meet its cash-flow needs this year, but it first plans to pay off registered warrants issued during the budget crisis.
The $1.5 billion loan - technically a private placement of interim revenue anticipation notes - will be repaid when the state goes out to market with the big cash flow borrowing in mid-September. JPMorgan offered California a bridge loan of as much as $4 billion.
"Everybody's goal was to get into a position where we could stop issuing IOUs as quickly as possible," said Lockyer spokesman Tom Dresslar. "The issuance of IOUs has inflicted a stigma on California's reputation and created hardships for the recipients of IOUs, and the sooner we can remove that stigma and end that hardship, the better."
Standard & Poor's took California's general obligation and lease-backed bonds off CreditWatch with negative implications and affirmed its credit ratings. The outlook on the A-rated GOs and A-minus rated lease-backed bonds remains negative, but the removal from CreditWatch suggests a downgrade is not imminent.
"The rating affirmations and CreditWatch removal reflect our view of the state's credit following the state's July 28, 2009 adoption of its 2010 budget amendment, which we believe significantly reduces state expenses and provides a path to improved financial liquidity," said Standard & Poor's analyst Gabriel Petek in a news release.
The move affects $67.1 billion of GO debt, $8.1 billion of appropriation-backed lease revenue debt, and $2.0 billion of GO commercial paper.
Because of the state's budget and cash crunches, Controller John Chiang has issued almost $2 billion of IOUs to creditors since July 2 to conserve cash for payments with legal priority, such as GO debt service and education aid.
In late July, lawmakers passed a package of budget revisions to close a budget gap of more than $20 billion that had opened up since an earlier deficit-reduction package was adopted in February.
The interim borrowing from JPMorgan and IOU repayment plan must be approved by the state's Pooled Money Investment Board, which will hold an emergency meeting Friday. State fiscal officials are asking the board to approve a Sept. 4 redemption date for the registered warrants, almost one month earlier than the Oct. 2 maturity date printed on the IOUs.
The state will release terms of the loan and more details after that meeting, Dresslar said. If the PMIB approves the plan as expected, holders of IOUs will be able to take them to the state treasurer's office in Sacramento for repayment on Sept. 4 or mail them in for redemption, he said.
JPMorgan Chase was one of the first banks to exit the federal government's Troubled Asset Relief Program, and it has been flexing its balance sheet as it seeks to capitalize on its strength relative to competitors like Citi that remain on government life support.
JPMorgan earlier this year expanded its traditional muni liquidity and letter of credit book by $10 billion. The loan to California comes from a different pool of money that the public finance group has used to buy - or make commitments to buy - billions worth of notes by issuers facing cash crunches, including Illinois and New Jersey.
"We did a good job of protecting our franchise and our balance sheet, and we've been very serious about deploying that around the country and trying to help issuers," said Jeffrey Bosland, the head of JPMorgan's tax-exempt capital markets and public finance group. "Our goal is to be seen as a senior business partners to our clients, and deploying our capital is one way that we can help them."
Last October, California had to offer yields between 3.75% and 4.25% to sell $5 billion of Rans at the height of the financial crisis that followed the bankruptcy of Lehman Brothers Holdings Inc.
"Clearly, [the private placement] helps build our business, but it's a huge step forward for the state of California," Bosland said. "My guess is that the market will draw strength from the fact that the state of California has access to bank capital."