California May Seek Bridge Loan Before Deadline for Debt-Limit Agreement
California is considering seeking a bridge loan from Wall Street ahead of an Aug. 2 deadline for raising the federal debt ceiling, in case talks fail and send the bond market into turmoil, Treasurer Bill Lockyer said.
Proceeds from the loan would be used to help pay the state’s bills until Lockyer can sell an estimated $5 billion of so-called revenue-anticipation notes, or RANs, scheduled for late August. Without those notes, the state could run out of cash as it did in 2009, when it issued $2.6 billion of IOUs.
President Barack Obama and Republicans in Congress are scrambling to work out an agreement to boost the legal debt ceiling. The Treasury Department has said the U.S. will reach the limit of its borrowing authority on Aug. 2. Lockyer said a U.S. default would wreak havoc on credit markets at the time California plans to borrow the money.
“We are hoping to get our borrowing done before Aug. 2,” Lockyer told reporters following a speech yesterday in Sacramento.
A failure to raise the nation’s $14.3 trillion debt limit would lead to a “major crisis” and throw “shock waves” through the financial system, Federal Reserve Chairman Ben S. Bernanke said yesterday at a House Financial Services Committee hearing.
Moody’s Investors Service put the U.S. under review yesterday for a credit rating downgrade, adding to concern that political gridlock will lead to a default. The company warned it may lower 7,000 ratings on $130 billion in municipal debt backed by U.S. Treasury or other federal securities or repaid with federal money such as Medicaid grants and economic-stimulus aid if the U.S. loses its top rating.
Federal Payment Delays
Lockyer said he’s concerned about the possibility of federal delays in Medicare subsidies and other payments to California and about long-term reductions in U.S. aid to states. A default, he said, could prompt the federal government to prioritize payments to states that would affect California’s cash flow.
“The ripple effect on state and local finances is very substantial,” he said. “Depending on how long the delay was, you might have a cash-flow hit. Of course, the budget negotiations might result in reduced payments to the states. There’s two kinds of worry.”
California has used bridge loans before. It borrowed $6.7 billion from JPMorgan Chase & Co. (JPM) and five other banks in October when a record 100-day budget impasse prevented Lockyer from issuing RANs.
$10 Billion Sale
The state paid 1.4 percent on the loan, which was repaid when Lockyer sold $10 billion of RANs at the end of November. The state took out a similar $1.5 billion bridge loan in August 2009 after an impasse then forced the state to issue IOUs to pay bills.
Yields on RANs have plunged along with Treasuries. One- year, tax-exempt note yields fell to 0.31 percent last week, according to a Bond Buyer index, down from 0.64 percent a year earlier and 3.71 percent in 2007, before the recession.
The new bridge loan would be repaid by the RANs, which the state would pay off when the bulk of taxes is collected later in the year.
Lockyer sold $10 billion of RANs in November, including $2.25 billion of notes that came due in May with a yield of 1.5 percent and $7.75 billion that matured in June at 1.75 percent.
Those May notes yielded 98 basis points, or 0.98 percentage point, more than top-rated one-year debt at the time and the June notes yielded 123 basis points more, Municipal Market Advisors data show. California sold $8.8 billion of such notes in September 2009 and $5 billion the year before.
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