Regional News

California Planning $4B, Including BABs

SAN FRANCISCO - California is moving ahead with plans to issue up to $4 billion in taxable general obligation bonds, including Build America Bonds, either next week or the week of the April 20, the treasurer's office said.

The state is planning to issue $3 billion to $4 billion in GOs, split between straightforward taxable bond projects and the Build America Bonds. The BABs are a product of federal stimulus legislation that permits states to issue taxable bonds for projects eligible for tax-exempt financing, and receive a subsidy from the U.S. Treasury. The Treasury Department Friday issued preliminary guidance on the bond program, which alternatively can offer investors a federal tax credit.

"We had our lawyers look at the guidance and we concluded that nothing will prevent us from going forward as planned this month," said Tom Dresslar, spokesman for California Treasurer Bill Lockyer.

Dresslar said the state has not named underwriters for the taxable sale yet, though it will do so soon. Last month, he said the treasurer's office has been consulting with Goldman, Sachs & Co. and JPMorgan on the BAB program.

How the deal would mix the straight-ahead taxable debt with BAB-eligible taxable bonds has also yet to be determined, Dresslar said yesterday.

"We do not have to designate the amount of the issue that will be allocated to Build America Bonds before the sale," he said. "We don't have a number yet."

California needs to issue $1 billion in traditional taxable bonds to reimburse its pooled money funds for money already disbursed to taxable GO bond programs. It plans to use an additional portion of the proceeds to provide forward funding for taxable bond programs, such as affordable housing and stem cell research.

A maturity structure also remains undetermined. The deal will not be pitched to retail markets, as California did aggressively and successfully last month in a $6.5 billion tax-exempt GO bond sale that drew $3.2 billion in retail orders.

"The taxable bonds, we're mainly targeting at institutional investors," Dresslar said. "There will be no full retail Buy California Bonds campaign associated with this issue."

Without the draw of tax-exempt interest, taxable municipals lack the same obvious retail appeal.

To attract retail fixed-income investors, taxable munis would need to come at the right price, according to Alexander Anderson Jr., a private client portfolio manager at Los Angeles-based Envision Capital Management Inc.

"The yield California has to issue these at needs to be competitive with other taxable bonds, corporate bonds with similar credit quality," he said. "Larger-issue corporate bonds seem to be a little more liquid than the taxable municipals."

A successful GO bond sale this month will still leave the state government far short of the capital funds it needs to keep voter-approved GO bond projects moving along.

The state's recurring budget and liquidity crunches have wrecked California's historic system for moving funds to bond projects.

Until now, those projects have drawn funding from the state's Pooled Money Investment Account, to be reimbursed afterward with bond proceeds. That system is in disarray after California's budget woes pushed it into a nine-month absence from the new-money bond market that ended with last month's $6.5 billion deal.

The state's liquidity woes are not over either, with officials projecting the need for a $12 billion or more cash-management borrowing this summer.

For now, the state plans to use proceeds from sales of long-term GO bonds to provide upfront funding for projects.

That will require the state to deal with tax requirements, such as spend-down requirements, and tracking interest earnings on undisbursed funds, that were not a factor when using bond proceeds to reimburse, Dresslar said in an e-mail.

"But these are issues we and other tax-exempt issuers deal with all the time," he said. "So we anticipate no problems moving to a system that relies more on upfront funding."



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