Calif. DWR Revisits Refunding

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SAN FRANCISCO - The California Department of Water Resources plans to try again today to price for institutions $350 million of power supply revenue bonds that found no buyers in November.

The state is hoping that a December rally in the long end means that the municipal bond market has regained enough stability to refund the DWR debt, which initially financed electricity purchases during the rolling blackouts of 2001 and 2002. The debt is a mode conversion of bonds that were previously refunded in 2005.

Just before Thanksgiving, California attempted to convert the mode on $523 million of variable-rate bonds to fixed rate, and it experienced a new, 2008-style blackout - investors only wanted $173 million, or about a third, of its bonds.

"We're hopeful market conditions are more favorable this week than they were last November," said Tom Dresslar, a spokesman for California Treasurer Bill Lockyer. "Since this transaction is more of a refunding than a conversion, we'll have more flexibility to structure the pricing in a way that helps attract sufficient demand."

The failed conversion forced $350 million of debt back to liquidity providers - $150 million to Bank of America and the California Public Employees' Retirement System and $200 million to Citibank.

The bonds became bank bonds, paying a penalty rate of prime-plus-2%, a formula that currently yields 5.25%. As bank bonds, they were also subject to accelerated repayment.

The state's failure to convert the entire deal cast a pall over the California muni market at year-end, convincing other issuers to scale back plans for long-term issues coming to market this month or to make contingency plans in case no long-term buyers could be found.

After seeing the state and other issuers struggle to find buyers on the long end of the yield curve, San Francisco public finance director Nadia Sesay sought changes in city ordinances to allow her to sell bond anticipation notes if she couldn't find buyers for $136 million of voter-approved general obligation bonds the city plans to sell this month to begin reconstruction of San Francisco General Hospital.

California's power supply revenue bonds are backed by fees on electric bills of customers of the state's three investor-owned utilities, which serve three-quarters of the state's retail electricity users. During the blackouts, the utilities needed state help to buy power. The DWR issued bonds to buy electricity, and the California Public Utilities Commission sets the power revenue bond surcharge at whatever level is necessary to pay debt service the outstanding bonds.

With that backing, the bonds' repayment is not subject to the vagaries of the state's on-going budget crises, and they garnered ratings equal to or higher than California's voter-approved general obligation debt. Moody's Investors Service rated the bonds Aa3, while Fitch Ratings and Standard & Poor's rated them A-plus.

While the state has put most issuance on hold because of a budget impasse, it hopes to be able to sell the power bonds.

A syndicate of 10 underwriters, led by JPMorgan, offered the bonds to retail customers yesterday. They plan to offer them to institutions today before finalizing pricing. The state preliminarily offered the debt with fixed rates and maturities in 2021 and 2022.

The results of yesterday's retail sales pricing were not available by press time. The $173 million that the state successfully converted in November yielded 4.35% in 2016 and 4.7% in 2018.

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