PHOENIX – California priced what state officials said was a very successful general obligation bond sale this week, in which the youngest of the co-manager firms got its first-ever crack at bringing its direct-to-individual sales platform to a California state bond sale.
Based on some early indications, many of those individuals weren't impressed with the low-yield environment of the municipal bond market.
State Treasurer John Chiang announced the completion of the $2.5 billion sale Wednesday. The negotiated deal included $802 million in new money borrowing, and $1.7 billion of refunding.
Yields ranged from .77% for 2018 maturities to 3.27% for 2047, on paper with coupons ranging from 3% to 5%.
The overall true interest cost for the sale was 3.01%, according to the treasurer's office. California GOs carry ratings of Aa3 from Moody’s Investors Service, and AA-minus from S&P Global Ratings and Fitch Ratings.
“The strong demand for California’s bonds and the low interest rates that were achieved are a testament to investor confidence in our state’s economy and financial management,” Chiang said in a statement. “The sale of these bonds will provide funding for vital infrastructure projects and will save taxpayers hundreds of millions of dollars over the life of the bonds due to refinancing.”
Deputy Treasurer Tim Schaefer said that while judging the success of the sale against previous issuances is problematic because of shifting market conditions, he considered the GO sale very successful.
“We were very pleased with the results,” Schaefer said. “We think we had a very good sale.”
Goldman Sachs & Co. and Stifel Nicolaus & Co were joint senior managers on the deal, with Fidelity Capital Markets and Ramirez & Co., as co-senior managers.
A total of 29 firms were part of the deal, according to Thomson Reuters, including the youngest member of California’s underwriting pool, San Francisco-based Neighborly Securities, which had its first-ever opportunity to sell California state bonds through its retail-oriented online platform.
Neighborly’s platform targets investors with a personal, local or social interest in the projects they are funding, and says that its technology allows it to reduce costs enough to sell to individual investors.
Neighborly's would-be investors also had an interest in earning interest, one that California's high-demand GOs were hard pressed to satisfy.
Neighborly ran an “Open Book” bidding process in the days before the sale, asking participants to express non-binding interest in certain maturities and name the minimum yield they were willing to accept. The results, gleaned from $1.86 million of bids, fell outside of eventual market results: the most popular maturities were 2018, 2019, and 2047, with the 2018 and 2019 maturities receiving median bids of 2.25 and 1.04 respectively.
The 2018 maturity in this week's deal priced to yield 0.77%, and 2019 yielded 0.92%, according to Thomson Reuters data.
“As you can see, there were some kinks in the pricing people demanded!” Neighborly noted. “These yields are of course just an indicator, but we’re hoping that as Neighbors become more used to the Open Book bidding process, we’ll see bids cluster around market rates.”
The California Debt and Investment Advisory Commission, an arm of the State Treasurer's Office, had previously identified Neighborly as being among new platforms developed to help spur direct community investment, a potential aid in helping to improve the “relatively inefficient and illiquid” muni market.
“Much like the Golden Gate Bridge was built with the support of individuals, California is looking to give the municipal bond new life again by making bonds more accessible through the Neighborly platform,” said Neighborly chief executive office Jase Wilson. “With federal infrastructure plans stalled and states and local communities struggling with limited funds, Neighborly helps tap individuals to publicly finance projects they care about.”
Neighborly was among the firms and programs cited in a June 2016 CDIAC report on alternative trading systems.
“Neighborly provides citizens with access to investment in public projects in their communities,” CDIAC said in that report. “Neighborly democratizes access to the municipal market and simplifies the process of investment. The site allows users to identify their location and interest in public issues (e.g., education, clean energy) and matches them with pertinent investment opportunities. This service contrasts with the traditional method of investing in the municipal market through the use of a broker which can be more costly and time-consuming.”
CDIAC noted that other states have also taken steps to use technology to become more active in promoting the efficient pricing of their bonds.
In 2014, for example, Massachusetts introduced a program to provide investors with direct access to the state’s GO bonds. The bonds were offered on a rolling basis for the last two weeks of every month for a six month period through TMC Bonds. Each month fixed-rate bonds GO were offered.
The offerings were repriced and allotted daily to account for demand. For each two week period, the bonds issued were the same, sharing the same denomination, credit rating, and CUSIP. The bonds sold through this program represented a twelfth of Massachusetts’ annual bond issuance, CDIAC said.
The report also highlighted the Israel Direct Bond Program in which 75% of the investments are held by retail investors worldwide, and a program in Kenya in which treasury bonds were offered exclusively on mobile phones.
This week's new money bonds were largely slated to provide money for school modernization and construction projects. Proposition 51, approved by voters in November 2016, authorizes the sale of up to $9 billion in general obligation bonds for K–12, community colleges, charter schools, and vocational education facilities.
"The sale of these bonds will help provide critically needed money to build or remodel school facilities across the Golden State," said Chiang. “Our students and teachers deserve quality environments where they have access to the latest tools and technologies needed to compete in a rapidly evolving global economy that puts an emphasis on education.”
Orrick, Herrington & Sutcliffe was bond counsel. Public Resources Advisory Group was financial advisor.
California’s next state GO bond sale will be a competitive deal currently slated for Oct. 3 with a par amount yet to be determined, according to the treasurer’s office.