LOS ANGELES -- The California State Public Works Board is planning to sell $473 million of lease revenue bonds next week to finance construction and improvements at various state correction facilities and universities.
Joint senior managers Siebert Brandford Shank & Co. and U.S. Bancorp Investments, Inc. are expected to price the bonds on Wednesday. Fidelity Capital Markets is a co-senior manager.
The deal is the latest in a flurry of bond sales by California and its agencies — including $764 million of general obligation bonds and a $2.6 billion refinancing by the University of California — as the state’s credit spreads have continued tightening in past months.
“The Proposition 30 increased revenue has brought a lot more parties interested in owning the state’s credits,” said Craig Brothers, managing director and portfolio manager at Bel Air Investment Advisors. “We’ve seen a big pick-up in demand for both names — the state and the lease credit — this year.”
Proposition 30 was a voter-approved measure to increase sales and income taxes to prevent cuts to the education budget. Since the measure passed in November 2012, spreads on California’s general obligation bond yields have contracted against Municipal Market Data’s generic triple-A municipal bond. By Sept. 24, spreads on California’s five-year bonds were down to 14 basis points from 41 basis points in November.
On ten-year bonds, spreads came down to 50 basis points in September from 67 basis points last year.
“There’s a potential now for the state to really be borrowing at one of the best spreads that they’ve probably had in over ten years,” Brothers said. “The state’s bonds in the intermediate range, which is what we look at, have tightened dramatically, and the Public Works bonds just basically follow along behind the state’s bonds.”
Brothers said his firm is a big holder of California’s Public Works bonds and he likes the credit, but whether he participates in the deal will depend on what spreads the bonds come at.
“Demand is going to be great because there’s been a real shortage of new issue paper in the state over the last two to three months and the treasury market has a strong bid to it right now,” he said. “We had a rough period there, but now we’ve been rallying.”
The majority of the proceeds from next week’s deal will go toward prison and jail projects throughout the state. Two series totaling around $305 million are being issued for the Department of Corrections and Rehabilitation and a third series of $168 million of bonds are being issued for the Trustees of the California State University.
Although California’s governor recently signed legislation addressing prison reform, this financing does not have anything to do with that, according to H.D. Palmer, spokesman for the State Department of Finance.
On Sept. 12, Gov. Jerry Brown signed Senate Bill 105, which proposes a long-term prison overcrowding solution by establishing significant funding to reduce inmate recidivism.
The bill was a compromise between two proposed prison reform plans — a $315 million plan from Brown and a separate plan from Senate President Pro Tem Darrell Steinberg, D-Sacramento — that offered solutions to comply with a federal court order to limit state prison population by Dec. 31.
Palmer said next week’s financing has more to do with Assembly Bill 900, a 2007 bill to address health care space deficiencies and overcrowding in California’s prisons.
The bill authorizes the Department of Corrections and Rehabilitation to design and construct new buildings, and make necessary improvements at facilities to provide medical, dental, and mental health treatment.
The CDCR will use around $166 million of the proceeds to finance health care facility improvement projects at four institutions: the California Medical Facility in Vacaville, the California State Prison in Solano, the Richard J. Donovan Correctional Facility in San Diego, and the California Institution for Women in Chino. Proceeds will also be used to partially finance the heath care facility improvement project at the California Institution for Men, also in Chino.
The bonds will be secured by the site lease and facility lease for the Wasco State Prison property in Kern County, which is separate from any of the health care project buildings.
Another series of $138 million of the proceeds will finance and refinance the construction of three jail facilities for the CDCR. The majority — $100 million — will be used to finance the construction of a new adult commitment center for the San Bernardino Jail Facility in Adelanto.
Approximately $26 million will go toward construction of another adult commitment center for the Calaveras Jail Facility, located in San Andreas. The remaining portion will finance a commitment center at the Shasta Juvenile Facility in Redding.
Construction on all three projects is underway.
The third series of bonds will include $168 million for California State University. Proceeds will finance the construction of three new buildings, at Chico State, the CSU Channel Islands, and CSU Monterey Bay.
The bonds are secured by lease rental payments made by state agencies to the SPWB from first lawfully available funds for use and occupancy of the facilities, subject to annual state legislative appropriation.
The SPWB, created in 1946, is empowered to acquire, construct, improve, and operate public buildings and related facilities for state agencies. Since 1985, it has been active in the construction of facilities for purposed including higher education and corrections.
Standard & Poor’s and Fitch Ratings have assigned the bonds A-minus ratings and stable outlooks. Both ratings are notched off the state’s general obligation rating of A, for both agencies, based on the appropriation required for debt service payment.
“Each series in the current sale is being issued under separate series indentures either pursuant to or incorporated into the master indenture, and thus they benefit from parity access to the SPWB’s $164.5 million master indenture reserve,” Fitch analysts said in a report.
The master indenture reserve currently backs about $10.6 billion in outstanding SPWB lease bonds under the master indenture.
Moody’s Investors Service assigned an A2 rating to the bonds financing prison projects, and a Aa3 rating to the bonds financing the university projects.
“The A2 rating reflects strong legal mechanisms for lease payments in spite of some abatement risk, the weaker security provided by lease revenue bonds relative to the state’s general obligation debt, and the credit standing of the State of California, whose general obligation debt is rated A1 with a stable outlook,” analysts said in a report.
They added that the bonds benefit from the presence of the SPWB’s master indenture reserve fund, which is available to pay debt service in various circumstances, including abatement events that may not fully be covered by casualty or rental interruption insurance.
The Aa3 rating on the third series of bonds is based on the lease structure and is notched off of the university system’s Aa2 rating on its systemwide revenue bonds. That rating is based on the system’s strong market position as the nation’s single largest four-year higher education system, ample liquidity and ability to work through funding cuts, offset by the state’s A1 rating.
Stradling Yocca Carlson & Rauth is bond counsel on the deal and KNN Public Finance is financial advisor.