California (STOCA1), poised for its first credit upgrade by Standard & Poor’s since 2006, got orders for almost 31 percent of $1.35 billion of bonds being sold with its relative borrowing cost at the lowest point in more than three years.
California yesterday ended two days of marketing to individuals of securities including bonds maturing in 10 years with a preliminary yield of 2.82 percent, said Tom Dresslar, a spokesman for Treasurer Bill Lockyer.
The yield, unchanged from the previous day, was 68 basis points more than a Bloomberg Fair Value index of top-rated bonds. The spread, or difference compared with AAA debt, hasn’t been that small since December 2008, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
“The spreads between California general obligations and triple A show a good acceptance of California paper,” said Joseph Rosenblum, municipal-credit research director at AllianceBernstein LP in New York. The firm manages $5 billion in municipal debt issued in the state, including about 12 percent in California GO bonds.
S&P puts California’s credit at A-, its fourth-lowest investment grade and the worst ranking for any state’s general- obligation debt. The rating company in February changed its outlook to positive after Governor Jerry Brown, 74, and lawmakers took steps to ease a projected cash shortfall and cut a $20 billion annual structural deficit by three quarters.
“They have made some progress in terms of their financial situation,” Rosenblum said.
“The narrower spreads speak to the budget actions taken over the past couple of years by the governor and the Legislature,” Dresslar said yesterday by telephone.
The most-populous state will wrap up the offering today, taking orders from institutional investors such as mutual funds and setting final prices. Individuals ordered $418.9 million of the securities, Dresslar said yesterday by e-mail.
In California’s most recent general-obligation bond sale, of $2 billion from Feb. 28 to March 1, individuals bought almost 47 percent of the debt, according to Dresslar. Orders from individuals accounted for almost 24 percent of a $2 billion general-obligation offering Oct. 17-19.
This week, Lockyer is selling $890 million of general- obligation bonds for public works and $464 million to refund debt. He offered 30-year maturities at 4.45 percent for a second day, 79 basis points higher than the AAA Fair Value index.
California has reduced the amount of general-obligation debt it sells to the smallest two-year total since 2006 as lawmakers work to erase deficits. The latest issue will probably be the last until around October, Dresslar said.
Combined with a proposal by Brown for a temporary tax increase, the lack of new offerings has stoked demand after municipal-bond yields reached four-decade lows earlier this year. The rate on general-obligation debt rated Aa2 by Moody’s Investors Service and maturing in 20 years fell to 3.6 percent in the week ended Jan. 19, the lowest since April 1967, a Bond Buyer index shows. The index climbed to 4.08 percent last week.
“A lot of issuers have been coming to market,” AllianceBernstein’s Rosenblum said. “Supply is up so the market is opening up.”
The narrowing difference between California bonds compared with top-rated debt has cooled interest among some investors.
Spread Too Small
“We did see the deal and perceived it as narrow and so we declined it,” said Josh Gonze, co-manager of the $297 million Thornburg California Limited-Term Municipal Fund in Santa Fe, New Mexico. “We want to see more spread for this credit.”
“But other investors will approve of it and say yes,” Gonze said earlier this week. “So they will get the deal sold.”
Brown, a Democrat, has proposed erasing a $9 billion budget deficit partly by asking voters in November to raise income and sales taxes for several years. If the increase is rejected, his plan calls for $5 billion of automatic cuts midway through the fiscal year that begins July 1. Most would come from schools.
The state’s financial condition remains precarious. March revenue trailed budget projections by 4.2 percent, missing the forecast by $233.5 million, according to Controller John Chiang.
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