Deal in Focus

California Securitizing a Repayment Promise

SAN FRANCISCO — The next storm in an ongoing blizzard of California state paper comes Tuesday, when the California Statewide Communities Development Authority will price a deficit-­driven deal in the $1.5 billion range.

The California Proposition 1A Receivables Program revenue bonds are being issued to securitize the state government’s promise to repay money it is borrowing from local governments to help balance this year’s budget.

Proposition 1A was a 2004 ballot measure, driven by local governments tired of seeing their coffers raided to patch the state’s deficit, that was designed to make it more difficult for the state to borrow from localities and more structured and organized when it does.

This year, faced with a yawning general fund gap driven by the recession, the state’s budget writers exercised California’s Proposition 1A borrowing authority for the first time, allowing it to borrow 8% of local governments’ property tax revenue, or $1.9 billion, with the requirement that the debt be paid within three fiscal years.

Lobbyists for the local governments secured language in this year’s enabling legislation that requires the state to pay the issuance, interest, and debt-service costs for localities that securitize the borrowing through the CSCDA. Proceeds from the deal will be disbursed to local governments in lieu of the property tax revenue and the state will repay the bonds with interest.

More than 1,400 local agencies, representing about $1.5 billion of California’s planned property tax borrowing, have expressed interest in joining the securitization, though the final numbers probably won’t be clear until Monday, CSCDA program manager James Hamill said in a phone interview.

“We still have applications rolling in,” he said.

The authority issued a preliminary official statement this week using $1.5 billion as its planned par amount.

“On Monday we’ll have a better idea,” Hamill said. “It probably won’t be higher, and it may be lower.”

Goldman, Sachs & Co. is managing the deal. Orrick, Herrington & Sutcliffe LLP is bond counsel. Stradling Yocca Carlson & Rauth is disclosure counsel. Greencoast Capital Partners LLC is program consultant.

Between the state constitutional provisions of Proposition 1A and the authorizing statute, the securitization bonds hold a legal repayment priority just below the state’s general obligation bonds, which means they are ahead of every other state program except K-12 education.

As a result, the rating agencies have assigned the deal the same ratings they assign California’s GO bonds — BBB with stable outlook from Fitch Ratings, Baa1 with stable outlook from Moody’s ­Investors Service, and A with negative outlook from Standard & Poor’s.

“Authorizing legislation for the bonds also provides for a continuing resolution so that late budget adoption by the state will not impair semiannual interest payments, which are due on June 15 and Dec. 15 each year, or the principal payment, due on June 15, 2013,” Standard & Poor’s analyst Gabriel Petek wrote in his rating report.

The CSCDA issue is merely a snowflake in the recent avalanche of California ­issuance.

Since the beginning of October, California has issued $10.4 billion of state bonds in the form of GOs, lease-revenue bonds, and a sales-tax backed deficit bond restructuring that also carries a GO pledge.

There’s more activity to come. A $1.3 billion revenue bond deal from the California State Public Works Board is on the calendar for the week after next, and $700 million of University of California revenue bonds are slated for the week after Thanksgiving.

In a roundabout way, next week’s CSCDA issue will function much like a deficit bond — effectively, the state is borrowing the money to deal with this year’s deficit, and will have to repay the money in three years with interest.

The state is using a conduit to sell the bonds but the enabling legislation requires both the treasurer’s office and the ­Department of Finance to sign off on the deal, since it will be repaid out of the state’s coffers.

“Obviously we have a direct interest in containing the borrowing costs to the maximum extent possible, because we’re footing the bill,” said Tom Dresslar, spokesman for Treasurer Bill Lockyer.

To further that end, the treasurer’s office is also using its Buy California Bonds ­program to market the deal to retail ­buyers.

That includes radio and print ads targeted at readers and listeners in the Los Angeles, San Diego, and San Francisco metro markets.

“It’s our standard advertising campaign,” Dresslar said.

The marketing challenge is shaped by the bond structure, which had to be designed around laws created to achieve a political compromise, rather than a low cost of capital.

Not only is it a sizable deal, but it’s a single maturity due in 2013.

Overall market conditions may provide some favorable tidings for the offering, according to a municipal market research report that was released last Friday by JPMorgan.

“With crossover trades working on either end of the yield curve, some of the taxable investors sandwiched between have begun to wonder if they should consider munis,” wrote JPMorgan fixed-income analysts Alex Roever and Chris Holmes.

“Several inquiries have come from ­investors focused on one-to-five-year ­tenors. In this part of the yield curve, [Build America Bond] supply has been paltry, as year to date only about $660 million of these securities has been priced with maturities less than five years. That mostly leaves the classic tax-exempt muni product as the main alternative.”



Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.