SAN FRANCISCO — California is working on a $5 billion bridge loan from banks to avoid the potential market chaos that could be caused by a possible U.S. government default due to political gridlock over the nation’s debt limit.
The state is trying to secure the interim loan from a group of banks before Aug. 2, the deadline for the U.S. Congress to raise the debt limit before a default. The loan would temporarily replace a revenue anticipation note sale of the same amount that had been scheduled for late summer, according to Tom Dresslar, a spokesman for California Treasurer Bill Lockyer.
“As the Fed chairman said last week, if they miss the deadline, the market would be thrown into chaos,” he said. “Obviously we don’t want to be selling $5 billion of Rans in a chaotic market.” The loan, technically a private placement interim note sale, would be paid off through a standard public Ran sale later in the year.
The treasurer’s office had been set for its annual note sale this summer to manage cash flows of state operations while awaiting tax receipts that come in disproportionally toward the end of the fiscal year.
In 2010, California took a $6.7 billion bridge loan to give the state time to prepare a public Ran sale after the state budget was adopted 100 days into the fiscal year. The bridge loan from a group of six financial institutions was repaid after California sold $10 billion of Rans in the public markets in November.
In 2009, the state got a bridge loan of $1.5 billion from JPMorgan to help pay off IOUs issued during the cash-flow crisis caused by a delayed budget. The loan was repaid after the state’s traditional Ran sale later that year. The new loan would help the state avoid a potential repeat of October 2008 when it sold $5 billion of Rans at the height of the financial crisis following the collapse of Lehman Brothers, and had to offer yields between 3.75% and 4.25% for the short-term notes.
Even if Congress reaches a deal, Lockyer said significant federal cuts in state funding could broaden miseries already caused by cuts in the recently adopted California budget. “Those miseries could be amplified if now there is a round of federal cuts that piles miseries on top of miseries,” Lockyer told the local KQED public television station on Sunday.
He also noted a default could trigger downgrades of thousands of municipalities across the state and country that have their credit rating tied to the nation’s rating.
Standard & Poor’s analyst Gabriel Petek said although the agency still believes a federal default is unlikely, the possible disruption to capital markets would call into question California’s ability to go ahead with its planned cash borrowing.
“If the state secures a bridge loan before the federal deadline arrives, such a borrowing could help sustain their liquidity through the disruption to the market that we believe would be likely if an agreement were not reached allowing for the debt limit to be increased,” Petek said in an e-mail. Standard & Poor’s changed California’s outlook to stable from negative earlier this month, saying the state’s cash flow appeared unobstructed by its newly adopted budget.
Lockyer said in a letter last month to Gov. Jerry Brown and Democratic leaders that the budget reduces the need for cash-flow borrowing by as much as $2 billion, which set up the $5 billion of revenue anticipation notes for later this summer.
The Legislature’s initial budget vetoed by Brown had projected a $7 billion Ran sale. Under earlier projections, California had been slated to go to the municipal market this summer with an estimated $10 billion annual note sale that would help balance out tax receipts that come in later in the year.
Lockyer had warned that the state wouldn’t have a market for Rans unless the budget was honestly balanced.
The budget assumes $10.6 million in additional debt-service savings in fiscal 2012, the treasurer’s office said. California expects to sell $3.9 billion of general obligation bonds later this year after it skipping its traditional spring GO sale.
