California Refinances $1.8 Billion as Demand for Power Bonds Cuts Yields

California completed its sale of $1.8 billion in tax-exempt debt, dropping yields from preliminary levels as much as 0.05 percentage point after individual investors placed orders for more than half the offering.

The California Department of Water Resources sold securities with yields from 0.29 percent on debt maturing in May 2011 to 2.94 percent for bonds due in May 2020, according to data from Joe DeAnda, a spokesman for Treasurer Bill Lockyer.

The 10-year bonds were offered only to institutional buyers and were priced to yield 30 basis points more than AAA debt, according to an index from Municipal Market Advisors, a Concord, Massachusetts-based research company. Retail investors placed orders for 58 percent of the debt, or $1.05 billion in securities, DeAnda said.

“Investors realize it’s a solid credit and that it’s separate from the state,” said Kelly Wine, a senior underwriter at Encino, California-based RH Investment Corp.

Sales to institutional investors, such as mutual funds and insurance companies, were moved to today because of the demand from retail investors and favorable market conditions, DeAnda said. Tax-exempt bond yields fell at every maturity today, according to data from MMA.

California, the lowest-rated U.S. state, entered a record fourth month without an enacted budget last week. While the state can’t sell debt without a final spending plan, agencies still can, Bud Byrnes, chief executive officer at RH Investment, said earlier this week.

Fund Uses

The state is using the money to help pare costs on debt residents are still paying for the energy crisis in 2001 and 2002, when electricity prices jumped as traders manipulated the market. The state bought electricity on behalf of privately owned utilities that couldn’t pass along the cost to customers, paying for it with $11 billion of debt in 2002.

The water resources department, based in Sacramento, regulates and manages the state’s water usage. It sold $2.9 billion in tax-exempt revenue bonds in May, the largest offering of its kind this year. During that sale, retail investors bought almost 43 percent of the bonds. Lockyer increased the size of that sale from $2 billion because of demand from investors, who placed orders for more than half of the original amount.

Ten-year securities from that sale traded Sept. 27 at an average yield of 2.73 percent, or 12 basis points above top- rated debt, compared with a premium of 45 basis points on the sale date, according to MMA data. A basis point is 0.01 of a percentage point.

March Sale

The state sold $2.5 billion in general obligations in March, pricing 11-year bonds to yield 4.54 percent, which was 144 basis points above a comparable-maturity index of AAA debt from MMA. The securities traded Sept. 24 at an average yield of 3.44 percent, or 69 basis points above the index.

The water bonds have a higher rating than the state’s general obligations, which carry an A1 grade from Moody’s Investors Service, because they’re backed by revenue from consumer electricity bills. The securities are rated Aa3 by Moody’s and AA- by Standard & Poor’s, both fourth-highest investment grade, compared with AA by Fitch Ratings, one level higher.

A portion of the department’s sale also will end interest- rate swap agreements, according to a Sept. 24 Fitch report.

To contact the reporters on this story: Michael Marois in Sacramento at Alexandra Harris in New York at +1=;

To contact the editor responsible for this story: Mark Tannenbaum at

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