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Calif. Gets High Marks for $8.8B Ran Sale, Except From Fitch

CARLSBAD, Calif. — Fitch Ratings Tuesday assigned its F2 short-term rating to next week’s $8.8 billion California revenue anticipation note sale, denying the deal a trifecta of top-tier short-term ratings.

On Monday, Moody’s Investors Service rated the Ran offering MIG-1 and Standard & Poor’s assigned its SP-1 rating.

Fitch cited “a severely weakened economy, the uncertain direction of general fund revenue collections going forward, and a precariously balanced budget.”

Fitch also assigns California the lowest long-term rating of the three agencies: BBB, compared to Baa1 from Moody’s and A from Standard & Poor’s.

Treasurer Bill Lockyer, at The Bond Buyer California Public Finance Conference here yesterday, predicted that the Fitch rating would not impact the Ran sale.

“I think they’re basically irrelevant, so it’s OK,” Lockyer said.

The deal comes to market after a more than a year of ugly headlines about California’s perilous finances, culminating in the issuance of IOUs to many creditors and vendors for two months. Now it will have a split rating.

“The rating is based on the state’s projected cash flows and the cash cushion — including the amount of money borrowable from funds outside of the general fund — that is expected after repayment of the Rans, the coverage of the Rans in stress scenarios run by Moody’s, a covenant stating that any further note issuances in excess of $8.8 billion will have a maturity date after the final maturity date of the 2009-10 Rans, and the expectation that the state controller would use cash preservation tools, including issuing IOUs or revenue anticipation warrants (Raws), if necessary to ensure the repayment of the Rans,” Moody’s said in a news release.

The state is likely to have to issue additional notes later unless the Legislature takes action, according to a letter Controller John Chiang sent to legislative leaders Monday.

Before the session closed early Saturday morning, lawmakers failed to enact every element of a cash deferral program requested by the controller, and also failed to enact all prison system spending cuts they had promised in their most recent budget, according to Chiang’s letter.

He asked lawmakers to act in an expected special session later this year to help the state avoid the “additional costs” of a new borrowing.

As previously announced, JPMorgan will manage next week’s deal. The investment bank loaned California $1.5 billion in August to allow the state to begin redeeming IOUs. The new Ran sale will pay off the loan.

The state treasurer’s office “will mount an aggressive national ad campaign on radio and in print media” to sell the notes, said spokesman Tom Dresslar.  Lockyer said ads will run in California and in New York, Miami and Dallas as well.

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