SAN FRANCISCO — Underwriters involved in "egregious" California school capital appreciation bond deals will likely be cut out of state bond business next spring unless the debt is restructured, according Treasurer Bill Lockyer's office.
As a result of the warning, some firms involved have already begun discussions with Lockyer's office over how to tackle the perceived problem.
"Next spring probably is when some underwriters will start feeling the effect of their roles in egregious CABs deals, unless the transactions somehow are restructured," said Lockyer's spokesman Tom Dresslar.
The state, usually the largest issuers of debt in the country, will typically go to market in spring with its first general obligation bond sale of the calendar year. California issued $5.6 billion of GO bonds in fiscal 2012 — $2.39 billion in fall 2011 and $3.2 billion this spring.
Dresslar said the California Debt and Investment Advisory Commission recently updated its database of CAB deals and the treasurer's office staff is combing through the information for more potential deals it may consider unfair for taxpayers.
Lockyer caused a stir in October when he said he would cut out underwriters, advisors and bond counsel from state bond deals if they are unwilling to renegotiate capital appreciation bond deals that have high payment to principal ratios.
The treasurer said he would be supporting legislation to stop the practice.
Earlier in the fall, the treasurer's office highlighted CAB deals that it said fit the definition of egregious, citing deals done by Poway Unified School District in San Diego County and by the Santee School District, also in San Diego County.
Stone & Youngberg, which is now a subsidiary of Stifel, Nicolaus & Co, handled both of those deals. It is also a regular underwriter for state bonds.
Scott Sollers, a managing director of public finance with Stone & Youngberg in San Francisco, said his firm is in talks with the treasurer's office to try to find a solution for their concerns.
"We would like to work with the treasurer's office along with other stakeholders in the industry to develop guidelines that can be promulgated that would effectively deal with everybody's concerns," Sollers said.
CABs got bad publicity recently when the publication Voice of San Diego detailed how the Poway Unified School District in San Diego County sold $105 million of the bonds this year that require nearly $1 billion in debt service at their 40-year maturity, without an option to call the bond.
CABs pay a compounded interest rate and principal upon maturity instead of through regular payments over time.
Some school districts turned to CABs as a way to finance construction projects despite sluggish property-tax revenues amid legal limits on the amount of debt they can take on. The bonds allow them to defer debt-service payments in the short term, avoiding near-term property-tax rate increases, but incur much higher costs in the long run.
