California this week kicked off its fall issuance program featuring a "fairly heavy general obligation bond calendar," said Deputy Treasurer John Sheldon, entering a broader municipal market that is challenging record issuance volume levels.
California is beginning its fall borrowing program after investors have had to "digest an extraordinary amount of supply," said Travis McGahey, a vice president in municipal credit analysis at Payden & Rygel.
"That does not necessarily mean weaker demand for California. It just means the technical backdrop may be a little less supportive than it has been," he said.
Thursday's $3.145 billion California GO pricing topped what
"I would expect given we haven't come to market since spring with GOs, we will get a fairly broad response from investors, who haven't had access to our primary market product for a bit," Sheldon said.
"Higher interest rates in the general market might attract a broader investing group," he said in an interview ahead of Thursday's deal.
This week's deal was upsized by $345 million at pricing Thursday.
Bookrunner Wells Fargo priced the $600 million of new money — upsized from $300 million — to yield from 2.49% for the 2027 maturity to 4.55% for 2056.
The $2.545 billion refunding — up from $2.5 billion — priced to yield from 2.49% for the 2027 maturity to 4.39% for 2046.
Ramirez & Co. was joint senior manager. There were some two dozen co-managers.
Shelden noted that the state's refunding efforts are targeted solely at capturing debt service savings rather than restructuring debt.
The municipal advisor is Public Resources Advisory Group and the bond counsel is Orrick, Herrington & Sutcliffe.
Ratings of Aa2 from Moody's Ratings, AA-minus from S&P Global Ratings and AA from Fitch Ratings were affirmed ahead of the deal. All assign stable outlooks.
Given that this week's deal was heavy on refunding, there wasn't a lot the team could do to shape maturities to meet investor demand.
"When you do a fairly large refunding, those maturities have to be structured in a certain way," Sheldon said. "We can't extend maturities. We have a lot in the first 10 to 15 years of the curve."
Refunded bonds "can't be structured to demand, you have to take the demand where it is and if it isn't robust enough pull back some candidates," Sheldon said.
With the new money, "we can place it in a lot of different places along the curve," Sheldon said. "We are always looking at where investor demand is with new money and where we can meet that."
With refunding, "It's very much a bond-by-bond analysis as to whether we have savings," he said.
More bonds to come
Sheldon said the state may look to sell variable rate bonds later in the fall to alleviate pressure on fixed-rate issuance, alongside planned sales for veterans GOs and home purchase bonds.
On the state's
- The State Public Works Board, with a competitive $350 million lease revenue refunding deal Sept. 23 and $800 million of new money lease revenue bonds Oct. 20, with Jefferies running the books on $600 million of tax-exempts and Loop Capital running the books on $300 million of taxables.
- The competitive sale of $150 million of new money veterans GO bonds Oct. 27.
- A $75 million State Department of Veterans Affairs home purchase revenue bond deal the week of Nov. 1, with Academy Securities running the books.
- And the next various purpose GO deal, amount to be determined, the week of Oct. 4, with BofA Securities running the books.
The state is using this week's deal, and the broader fall slate, to maintain consistency as a borrower, Sheldon said.
"What underwriters have been saying is there is pretty good demand across the curve," Sheldon said. Separately managed accounts "are still active. I haven't been told or observed any particular aspect of the market is lagging."
Market Dynamics
The California deal comes during an exceptionally heavy August for the municipal market, with total monthly tax-exempt supply
While supply is heavy, McGahey noted that investor demand remains resilient, even as they become more selective on price.
"With this much paper coming through the market, investors can afford to be a little more selective on price and may demand some additional concession, even when they are perfectly comfortable with the underlying credit," McGahey said.
"Year to date fund inflows are already around $65.5 billion, the second highest on record for this point the year, behind only 2021, and we are now at 18 straight weeks of inflows," he said.
In a recent
The analysts believe that view was borne out as general obligation ratings remained stable and state tax revenues,
Structural challenges
"Just as markets risked overreacting to deteriorating budget headlines last year, they now risk overreacting to improving ones," McGahey said. "California's structural strengths remain intact, but so do its structural challenges."
McGahey highlighted that while California's near-term credit outlook has improved – driven by strong-than-expected revenue collections, particularly from capital gains and stock-based compensation – the state continues to face long-term structural challenges.
Specifically, the state faces projected annual structural deficits of roughly $10 billion through fiscal 2029-30.
"California's long-term credit trajectory will depend less on another year of exceptional capital gains realizations and more on policymakers' ability to convert today's fiscal strength into lasting structural resilience," the Payden & Rygel report said.
Despite the structural hurdles, McGahey said California's investment-grade ratings are appropriate, reflecting its deep and diverse economy, ample liquidity, and robust, if volatile, revenue structure.
"A significant portion of the improvement has come from capital gains and stock based compensation associated with the technology sector, which are historically volatile revenue sources," he said.
Total reserves are expected to grow to $35.2 billion in fiscal 2026-27. While a significant portion in the various reserve accounts comes from the restricted Proposition 98 reserves for K-12 education, the state is also rebuilding flexible reserves and establishing a new unrestricted surplus holding account.
The state's double-A category ratings remained unchanged over the past year, despite negative fiscal headlines on the state last year, Payden & Rygel analysts noted.
The report notes that the composition of California's reserves matters as much as the headline number — in fiscal 2024, for example, total reserves rose even as the state's flexible rainy-fund declined, with the increase driven by the restricted Proposition 98 Reserve.
One of the challenges faces is amount of the budget dedicated to health and human services, which could be at risk from the Trump administration's
HHS represents $145.2 billion, or 41.3%, of total state expenditures and is dominated by Medi-Cal, the state's Medicaid program, according to the report.
Further reductions in federal support could require the state to redirect additional general fund resources toward Medi-Cal and related programs.
The Legislative Analyst's Office's estimates of $10 billion underlying structural deficits represent a substantial improvement from estimates made last year, according to the report, but it still suggests that ongoing revenues are not yet sufficient to cover ongoing expenditures on a sustained basis.
The report views
The proposed constitutional amendment, referred by the legislature, would strengthen California's reserve framework by giving policymakers greater ability to set aside revenues during periods of exceptionally strong growth, complementing the state's existing formula-driven reserve requirements.
Payden & Rygel is also monitoring a
"We'll be watching the outcome of November's reserve amendment, the durability of capital gains-driven tax collections as the current technology investment cycle matures, and the state's response to reduced federal healthcare funding over the coming year," McGahey said.
Jessica Lerner contributed to this story.
