A bill designed to clarify California issuers’ ability to purchase their own debt cleared the Assembly this week.

State Treasurer Bill Lockyer requested the bill, which is designed as a response to the continued problems in the variable-rate bond markets that have caused most issuers of auction-rate securities and many variable-rate demand bond issuers to pay higher interest rates.

SB 344 would clarify that California law permits state and local issuers to repurchase some or all of their outstanding debt without extinguishing it.

That clarification would be helpful to issuers for several reasons, according to a legislative staff analysis. By allowing issuers to avoid extinguishing outstanding debt, issuers could retain existing bond insurance on that debt, avoid the possible requirement that they might have to reauthorize the debt before reoffering it, avoid possible questions about the tax-exempt status of the debt, and avoid triggering contractual terms that might require some issuers to pay termination payments on swaps.

The bill is the product of a so-called “gut-and-amend” maneuver, in which lawmakers take an existing bill out of limbo and completely rewrite it.

SB 344 has been declared an urgency measure, which means it would take effect immediately if it passes with more than two-thirds majorities. The bill passed the Assembly 70 to 3 on Monday, and a Senate committee approved the amended language Tuesday.

The state legislation appears to dovetail with guidance that the U.S. Securities and Exchange Commission is expected to release in an effort to provide relief to auction-rate issuers struggling with failed auctions.


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