SAN FRANCISCO — California Treasurer Bill Lockyer set a multi-billion dollar bond sale calendar for this spring that gives business to underwriters and bond counsels he had said would be excluded unless they restructured local capital appreciation bond deals Lockyer had criticized.
The treasurer now says those underwriters have helped enough to be allowed to get a piece of the slate, and as for bond counsel, he says there are few choices.
“You see a couple of underwriters who have gotten appointments that have been some of the major players in CAB deals — Stone & Youngberg, De La Rosa,” Lockyer’s spokesman Tom Dresslar said. “The treasurer has talked with them about their participation in past CAB deals and expressed his concerns. Both of those firms have committed to not underwriting CAB transactions that are outside of the bounds of the restrictions in pending reform legislation.”
Lockyer said last fall that he would cut out any underwriters, financial advisors or bond counsel involved in perceived bad CAB deals unless they restructured them. The comments followed a swell of news coverage in California about long-maturity, non-callable capital appreciation bonds issued by school districts with high interest-to-principal ratios.
The financial advisors in the targeted CAB deals had little or no role in the state’s bond sales in any event, according to the treasurer’s office.
Bond counsel are the opposite story.
“Despite their involvement in CAB deals, we will continue using Orrick mainly because the bond counsels are not exactly teeming with competition,” Dresslar said. “They are pretty much the only game in town.”
Orrick, Herrington & Sutcliffe, the top bond counsel by volume in the country, is slated to handle California’s spring general obligation bond sale.
De La Rosa and Stone & Youngberg, a division of Stifel Nicolaus, are set to work as co-senior managers on the state’s $1 billion University of California revenue refunding bond deal set for this month. De La Rosa is also listed as joint senior manager for the state public works board lease revenue bond sale this spring.
Neither are set to work on the two spring GO bond sales. The treasurer’s office has yet to set a size or date for those deals.
Legislation has been proposed to try to end the perceived problems with CABs, and Stone & Youngberg and De La Rosa have worked with treasurer’s office to help craft the reform, Dresslar said.
The bill by Assembly members Joan Buchanan, D-Alamo, and Ben Hueso, D-San Diego, would reduce the maximum interest rates for school and community college districts to 8% from 12%, require their ratios of total debt service to principal for each series of bonds not to exceed 4-to-1, and would require any bond maturing after 10 years to allow for a mandatory tender or redemption before maturity.
Capital appreciation bonds gained the spotlight after articles circulated about a deal done by Poway Unified School District in San Diego. The district sold $105 million of CABs in 2011 that require nearly $1 billion in debt service at their 40-year maturity, without a call option.
CABs pay a compounded interest rate and principal upon maturity instead of through regular payments over time.