PHOENIX – California's $2.79 billion March 7 general obligation bond sale was a marketplace success for the state, officials said, despite a persistent rumor about the deal's size and possible speculation about further interest rate increases.
The deal was largely a refunding, with the $2.28 billion of bonds used to retire existing debt creating about $295 million in present value savings and $406 million in debt service nominal savings over the remaining lives of the bonds, the state Treasurer's office said. Interest rates on the bonds, rated Aa3 by Moody's Investors Service and AA-minus by S&P Global Ratings and Fitch Ratings, ranged from 0.6% for the 2017 bonds to 3.9 percent for the 2046 maturity. The overall true interest cost was 3.56%.
"This demonstrates that despite the recent run-up in interest rates, we still can diligently work to save taxpayer money and build infrastructure that California badly needs," said Treasurer John Chiang. Refundings have saved more than $5 billion since Chiang took office in January 2015, the Treasurer's office said.
Deputy Treasurer Tim Schaefer said that it took some "chiseling" to get the entire sale into the maturities the state thought investors would be interested in, as the sale's size was taken up from an original $2.45 billion. Schaeffer said there was a persistent rumor on the street, which the state tried to downplay, that the deal was going to be taken up to $3.5 billion. While Schaefer said he couldn't speculate on how that rumor may have impacted the pricing, he said that investors might logically behave differently if they believed the deal was going to be much bigger.
"They're going to hold back a little bit," Schaefer said.
Schaefer said there also some concern that investors might be anticipating another interest rate hike when the Federal Reserve's Federal Open Market Committee meets March 14-15.
"It doesn't make any difference at this point because we walked away from the table feeling like we got a good deal," said Schaefer.
The new deal came between two and three basis points wider to the MMD AAA 30-year GO scale than California's nearly $3 billion March 2016 GO offering. The 2017 deal ranged from a low of 22 basis points over the spread in 2020 to a high of 32 in years 2023 and 2024. The 2016 deal ranged from a low of 20 basis points over the MMD AAA curve in 2019 to 30 in 2023.
