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Deal in Focus

California Ready for Its Return to GOs

SAN FRANCISCO — After a legislative kerfuffle that caused a one-week delay, California is on track to return to the bond market next week with a $2 billion general obligation bond deal.

It is the Golden State’s first GO deal in more than four months.

“We’re looking forward to kicking off 2010, and putting together the best deal possible for taxpayers,” said Tom Dresslar, spokesman for Treasurer Bill Lockyer.

The state last sold GOs in early November, a $1.3 billion tax-exempt deal.

JPMorgan and Morgan Stanley are co-running the books next week for a selling team of 30 broker-dealer firms. Public Resources Advisory Group is financial adviser. The deal is slated to price Thursday, after a two-day retail-order period.

The treasurer’s office will engage in what has become its usual retail marketing campaign for tax-exempt GOs, Dresslar said, with radio and newspaper advertising campaigns in northern and southern California markets directing potential retail investors to the office’s Web site, www.buycaliforniabonds.com.

The treasurer’s office first announced plans for the GO deal in late February, with the pricing originally set for yesterday, before the transaction became ensnared in an unexpected legislative entanglement.

The treasurer’s office, in collaboration with Gov. Arnold Schwarzenegger’s Department of Finance and the state ­controller’s office, had developed a cash-flow management plan they believed would help California avoid the liquidity crisis it experienced in 2009, when the controller ended up issuing $2 billion of IOUs to some creditors to preserve cash for those with higher legal priority, such as bondholders.

They did not expect any problem gaining passage of the enabling legislation, which gives state finance officials more flexibility to reschedule payments owed to school districts and other local agencies, in order to help the state maneuver around expected liquidity troughs.

But the bill, as an urgency measure, required a two-thirds vote for approval and it was delayed several days in the Assembly as minority Republicans asserted themselves and demanded more say in the budget process.

They eventually approved the bill Feb. 25, with the bare minimum of 54 votes. Schwarzenegger signed the measure Monday.

The cash-flow bill was one of several bills lawmakers approved after Schwarzenegger declared a fiscal emergency in January, warning that the general fund budget, despite two arduous balancing efforts during 2009, had fallen $19.9 billion in the red through fiscal 2011.

As part of the budget emergency session, lawmakers signed off on $2.1 billion in solutions, in the evident hope that April income tax returns will come in ahead of expectations and reduce the need for budget cuts.

According to Controller John Chiang, the state’s cash receipts for January came in more than $1.2 billion above projections, perhaps spurring some optimism.

The preliminary official statement paints a much more sobering picture.

“Absent further corrective action by the Legislature and timely adoption of a fiscal year 2010-11 budget, a significant cash-flow shortfall is projected in fiscal year 2010-11, which may require the issuance of registered warrants,” the POS says. “There can be no assurances that the fiscal stress and cash pressures currently facing the state will not continue or become more difficult, or that continuing declines in state tax receipts or other impacts of the current economic situation will not further materially adversely affect the financial condition of the state.”

Despite California’s seemingly endless fiscal follies and long run of bad headlines, Michael Pietronico, chief executive of Miller Tabak Asset Management, expects next week’s deal to find receptive investors.

“The bonds are currently trading in the market at relatively stable spread levels,” he said. “Considering the reception that the state of Illinois got in the market, just a small correction relative to secondary market levels before the sale, we would not be surprised to see a reasonably good reception for the state of California.”

Pietronico added that his firm prefers local credits for California clients — purely for diversification, not as a comment on the state’s credit.

Illinois priced $1.5 billion of debt in February. The state’s A to A-plus ratings are the second-lowest of any state— only California’s are lower.

The three major rating agencies affirmed California’s ratings ahead of next week’s deal — BBB from Fitch Ratings, Baa1 from Moody’s Investors Service, and A-minus from Standard & Poor’s. Moody’s and Fitch have stable outlooks, while Standard & Poor’s has a negative outlook following a January downgrade.

“The rating affirmations reflect our view of the state’s credit in light of both its severe fiscal imbalance and our opinion of its continued fundamentally strong capacity to fully fund its debt service obligations in a timely manner,” Standard & Poor’s analyst Gabriel Petek said in a news release Tuesday.

California plans to follow up next week’s offering with another one about two weeks later — a taxable GO deal with a Build America Bond component, also in the $2 billion range.

Lockyer, addressing the Assembly Budget Committee last week, said his office would increase either or both GO deals if demand is there.

Pietronico noted that with changes in the municipal bond market — the creation and likely extension of the federally subsidized taxable BAB program, along with legislation that would end tax-exemption altogether — a big tax-exempt deal such as California’s next week could be an increasingly rare bird.

Now add all that together with the inevitability of tax hikes in the long run because of the huge federal deficits, Pietronico said.

“You have what seems to be building a perfect storm,” he said. “Lower supply and higher demand for that supply.”

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