Trend in the Region

California GOs Snag Low Yields

SAN FRANCISCO — California plunged into a hungry market this week with its first general obligation bond sale of the year, grabbing yields far below its most recent sale last year.

Most observers attribute the successful multibillion foray to a municipal bond market at record low yields, with help from pent-up demand from investors with more confidence in the state’s finances.

California this week finished selling $2.39 billion of GO bonds, with yields of 1.61% on five-year maturities, 3.17% on 10-year bonds and 4.80% on bonds maturing in 30 years.

Those yields were on average 93 basis points lower than last November’s 2.66% for five-year maturities, 4.23% for 10-year bonds and 5.50% for 30-year debt.

The deal included a $1.109 billion refunding piece that saved the state $105 million in present-value terms.

“I don’t think the metrics of California have changed significantly; the state still has significant problems. I think the lack of issuance we have seen over the last year just makes these new issues more desirable for institutional buyers,” said Alexander Anderson, a portfolio manager at Envision Capital Management in Los Angeles. “Big institutions have a lot of money to spend and they are willing to buy at really low yields.”

Retail took 27.7% of the offering, leaving the rest for institutions.

Since its previous GO sale almost 10 months ago, California’s finances improved somewhat, which led Standard & Poor’s to change its outlook on the state to stable from negative after it passed its first on-time budget in five years.

“While the state certainly isn’t out of the woods, it seems that some investors are perceiving that they might have turned the corner,” said Michael Pietronico, head of fixed-income research at Miller Tabak Asset Management.

Because of its low ratings, California provided some yield to investors in a market hovering around all-time lows.

The state’s 10-year bond sold 105 basis points over the Municipal Market Data triple-A index on Tuesday, the final day of the deal. 

The 10-year municipal bond yield sat Tuesday at 2.12%, according to MMD, or just five basis points up from its all-time low recorded last week.

California is still the lowest-rated state in the union, according to Standard & Poor’s and Fitch Ratings, both of which assign an A-minus. The state carries a more positive A1 rating, two notches higher, from Moody’s Investors Service.

Gabriel Petek, S&P’s lead California analyst, said in the July report changing its outlook that the budget adopted at the end of June improved the state’s fiscal structure and reduced chances of cash-flow problems.

However, the budget is still far from sound. The $86 billion spending plan passed in June, the first on-time budget since 2006, depended on cuts plus $4 billion of future revenue to fill a $9.6 billion hole. If the $4 billion evaporates, cuts to education and other services will be triggered to bring the budget back toward balance.

So far state revenues have come in below forecasts. California Controller John Chiang, the state’s cash manager, said during a Bond Buyer conference last week that “everything must go right” for the triggers to be avoided.

But state Treasurer Bill Lockyer is still behind the budget.

“The market has taken notice of the budget and given California credit for improving its fiscal management — that’s what this budget does,” said Lockyer spokesman Tom Dresslar.

Petek said in an email Wednesday that the treasurer has consistently voiced caution about growth of the state’s debt portfolio, and Gov. Jerry Brown seems to be on the same page.

Brown has attempted to reduce the state’s “wall of debt.”

The governor pointed out in his budget that more than $11 billion of cash from bond issues has accumulated in department accounts, costing taxpayers more than $700 million a year in debt service for projects that have yet to be completed.

Brown’s push means the state will issue much less debt than in previous years. It already skipped its usual multibillion spring GO sale for the first time since at least 1988.

With only one GO offering on the table so far this year, the state has only taken up 4.2% of the market, compared to its $23 billion of GOs sold in 2009 that took up 41%. Last year, California sold $10.5 billion of GO debt for 18.7% of the market.

Looking ahead, Lockyer has said the state has preliminary plans to sell $15.5 billion of GO debt during this and next fiscal year: $10 billion of general obligation bonds and $5.5 billion of lease revenue bonds over the two-year period. But less debt in the market typically means better performance from existing debt and more demand for future deals.

“Given that they are only going to bring $15 billion over the next year, I think it is going to maintain demand for the name,” said Kelly Wine, executive vice president of RH Investment Corp., a broker-dealer in Encino, Calif. The firm was a manager on this week’s GO issue.

“I think it will keep things where they are right now — I don’t think we will see the spreads widen out again for quite some time,” Kelly said.

Lockyer said California will issue $450 million of lease revenue bonds in October and plans a smaller sale of around $300 million in November for various agencies. The state is also planning a refunding of its sales-tax-backed economic recovery bonds in November, for a yet-to-be determined amount.

Officials also expect to go to market next month with another GO sale but the figures have yet to be fixed as the Department of Finance is working out the needs of different agencies.

During a speech during The Bond Buyer California Public Finance Conference last week, Lockyer also presented a wide-ranging 10-year blueprint for future bond sales.

He said issuances could range anywhere from nothing to voters authorizing another $40 billion to pay for needs that include high-speed rail and more education spending.

The state has voter authorization for $37 billion of general obligation bonds and $12 billion of lease revenue debt for the 10-year period.



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