Regional News

California Bringing $4B

SAN FRANCISCO — California will bring the largest municipal bond issue since 2007 to market next week with across-the-board single-A ratings, following dual downgrades yesterday from Fitch Ratings and Moody’s Investors Service.

Fitch and Moody’s each dropped California one notch, to A and A2 respectively, in advance of next week’s $4 billion general obligation bond deal. Both agencies had earlier placed the state on watch for downgrade.

“The downgrade reflects the ongoing weakness of the state’s economic and revenue performance and Fitch’s expectation that the state will experience continued budgetary and cash flow stress going forward,” according to the agency’s rating report.

Standard & Poor’s lowered California to A in February, and affirmed that rating yesterday. Now all three agencies have California as the lowest-rated state, one notch under Louisiana.

The downgrades will not hinder California’s ability to market its bonds, said Tom Dresslar, spokesman for Treasurer Bill Lockyer, an outspoken critic of the rating agencies.

“We are going to sell $4 billion of GO bonds next week and we’re going to get the best possible deal for taxpayers,” Dresslar said.

Lockyer has long argued that state and local government issuers of tax-exempt bonds draw unfairly low ratings that exaggerate default risks.

“They have no credibility,” Dresslar said of the rating agencies yesterday after the downgrades were announced. “It’s completely shot. They enabled and colluded with [American International Group Inc.] and all the rest of the folks that are being bailed out by taxpayers. Now the economy is wrecked, and our budget is wrecked with it.”

California’s $4 billion deal will be the muni market’s largest since October 2007, when Ohio’s Buckeye Tobacco Settlement Financing Authority sold $5.53 billion.

California’s deal prices Wednesday, after a two-day retail order period. Citi and Merrill Lynch & Co. are co-senior managers.

The issue is so large because the state has been on the sidelines since June during a protracted budget and cash-flow crisis, creating a large backlog of projects needed funds.

Lawmakers enacted a budget in February to close a $40 billion-plus budget hole for fiscal years 2009 and 2010. But the state’s independent Legislative Analyst’s Office warned last week that the weak economy would probably create a new $8 billion revenue shortfall.

Eric Friedland, director of research at Belle Haven Investments, said he is not concerned about default risk on California GOs, noting that the state constitution protects bondholders and that the state would be reluctant to default because it needs continued access to the credit markets.

That said, the price has to be right to contemplate buying the paper, Friedland said yesterday.

“Our position here is that we’d like to see the spreads wider than they’ve been,” he said. “So far, they’ve been too tight for us to be a buyer on the GOs. We’d like to see them widen a bit.”

State finance officials froze funding for thousands of bond-financed projects in December. Even a successful bond sale won’t clear the backlog.

The state’s Pooled Money Investment Board voted Wednesday to keep the freeze in place, and release only $500 million for projects if all $4 billion of bonds are sold. The remaining proceeds would be used to reimburse the state Pooled Money Investment Account for loans to earlier projects.

“I believe a successful $4 billion deal should allow us to start providing relief from the freeze that has harmed our workers, businesses, communities, and economy,” Lockyer said in a statement. “But it will take time to return our infrastructure financing system to full health.”




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