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California Gets Sub-2% Yields on Record Rans

SAN FRANCISCO - After pricing its massive $8.8 billion revenue anticipation note sale on the low end of its projected yield range yesterday, California now turns to a general obligation bond sale planned in two weeks.

JPMorgan priced the notes - the second largest note sale on record, according to Thomson Reuters, after California's $9 billion Ran sale of 2002 - with a top yield of 1.5% for the $5.975 billion Series A-2, which matures on June 23.

The $2.825 billion series A-1, which matures May 25 making it effectively senior to the later notes, was priced to yield 1.25%.

"We were hoping yields would be over 2%," said Alexander Anderson Jr., a private client portfolio manager at Los Angeles-based Envision Capital Management Inc. "But they were certainly able to get away with one-and-a-half percent and one-and-a-quarter percent."

That's because alternative yields are so paltry, Anderson said, with tax-exempt California money-market funds yielding only one or two basis points. For customers who don't plan on touching their cash before June, the Rans offered an attractive option, he said.

The deal came to market with split ratings. Fitch Ratings assigned its second-tier F2 short-term rating to the notes, while Moody's Investors Service rated them MIG-1 and Standard & Poor's assigned its SP-1 rating.

The Ran offering drew $6.64 billion in retail orders, according to the California state treasurer's office, or 75.4% of the entire deal, including the entirety of the higher-yielding $5.975 billion Series A-2. That was the largest retail total ever, according to the underwriter.

Next up will be a GO sale the week of Oct. 5. Speaking last week at The Bond Buyer's California Public Finance Conference, Treasurer Bill Lockyer projected that the deal, a mix of tax-exempt bonds and taxable Build America Bonds would be in the $5 billion range. Such projections remain tentative, Lockyer spokesman Tom Dresslar said yesterday.

The treasurer's office projects selling $14 billion in new GO bonds during the fiscal year that ends June 30.

After a series of budget crises over the last year, California's long-term GO debt also has split ratings: BBB from Fitch, Baa1 from Moody's, and A from Standard & Poor's.

But spreads on California GO bonds have tightened dramatically in recent months, Alexander said. That may reflect the impact of taxable BABs on the market, he said.

"With tax-exempts, the supply of them has been depleted significantly, therefore demand for them has gone up and yields have gone down dramatically," he said.

He added that California retains a strong built-in market for its own bonds because of its state income tax rates, which were increased this year in reaction to the budget crisis, with the top rate jumping to 9.55% from 9.3%, with a further 1% surcharge on incomes over $1 million.

That means individual investors are less likely to look out of state, according to Alexander.

"If you're a California resident in a high tax bracket, there's a big give-up in giving up that tax-exemption in the nine or 10% tax rate," he said.

The treasurer's office has named Citi and Banc of America Securities-Merrill Lynch as joint book-runners for tax-exempt bonds and Goldman, Sachs & Co. and JPMorgan as book-runners for taxables.

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