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California Water Issues Year’s Third-Biggest Tax-Exempt Deal

The California Department of Water Resources leads issuers this week with a $1.9 billion offering, the year’s third-largest, as its relative borrowing costs have shrunk 73 percent since May.

California, the lowest-rated U.S. state, entered a record fourth month without a completed budget last week. While the state can’t sell debt without a budget, agencies still can, said Bud Byrnes, chief executive officer at Encino, California-based RH Investment Corp.

The department’s debt has a higher ranking than the state’s general obligations, which carry A1 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 above.

“The Department of Water Resources is one of the few state names that is not tainted,” Byrnes said. “Its power bonds and water bonds out-trade the state’s general obligation bonds.”

Last month, the University of California sold $486 million in taxable Build America Bonds with pricing for the May 2050 maturity at 250 basis points above 30-year Treasuries, according to data compiled by Bloomberg. The so-called spread for a 40-year maturity of the federally subsidized debt that the university sold in December was 225 basis points. A basis point is 0.01 of a percentage point.

Previous Sale

Sacramento-based DWR, which regulates and manages the state’s water usage, sold $2.9 billion in tax-exempt revenue bonds in May, the largest of its kind this year. The 10-year securities traded Sept. 27 at an average yield of 2.73 percent, or 12 basis points above top-rated debt, compared with a spread of 45 basis points on the sale date, according to Municipal Market Advisor’s data.

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, an independent research firm based in Concord, Massachusetts. The securities traded Sept. 24 at an average yield of 3.44 percent, or 69 basis points above the index.

Bonds maturing in May 2020 in this week’s sale are forecast to yield 50-55 basis points above Thomson Reuters Municipal Market Data AAA curve, according to a person with knowledge of the deal, who declined to be named because the transaction hasn’t been completed. The MMD index yielded 2.34 percent on Oct. 1.

‘Significant Savings’

“With this kind of size, you have to have levels that will garner enough interest,” said Regina Shafer, who oversees $5.3 billion in tax-exempt municipal bonds as assistant vice president of fixed-income investments for USAA Investment Management Co. in San Antonio. “Either way they’ll have significant savings from what they’re refunding. It’s certainly a good time.”

States and municipalities are poised to sell about $10.9 billion in securities this week, the most since March 26, a 14 percent increase since last week, Bloomberg data show.

Yields on top-rated tax-exempt general obligations due in 10 years climbed for a fourth-consecutive day Oct. 1, rising 1 basis point to 2.65 percent, the highest level in more than a week, according to MMA data.

California 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 in part because power-trading companies worked to manipulate prices.

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.

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

Following are descriptions of pending sales of municipal debt in the U.S.:

NEW YORK STATE DORMITORY AUTHORITY, the largest issuer of municipal debt in 2009 after California, plans to sell about $1.15 billion in tax-exempts and taxable Build Americas this week. The personal-income tax revenue bonds, which carry a top rating from Standard & Poor’s, will be used to fund projects for the State University of New York and City University of New York, in addition to grants for educational facilities. M.R. Beal & Co. will lead the marketing. (Updated Oct. 4)

NEW YORK CITY, the most-populous U.S. city, is borrowing $1.3 billion this week. The city will offer $800 million of taxable debt, including $650 million of Build America Bonds, earmarked for capital projects. The remaining $150 million in traditional taxables will be sold competitively on Oct. 7. New York also is offering $500 million in tax-exempts to refinance existing debt and convert $90 million in outstanding variable-rate demand notes to fixed-rate bonds. Bank of America Merrill Lynch will lead underwriters marketing the securities, which are rated AA by S&P and Fitch, third-highest, and Aa3, one level lower by Moody’s. (Updated Oct. 4)

METROPOLITAN PIER & EXHIBITION AUTHORITY, a municipal corporation created by the Illinois General Assembly that owns and manages Chicago’s McCormick Place convention facility and Navy Pier, plans to sell $940 million in tax-exempt revenue bonds as early as this week. They are secured by the authority’s tax revenue and will refinance $900 million of existing debt as well as fund construction and renovation. Underwriters led by Morgan Stanley will market the securities, top-rated by S&P, and AA- by Fitch, fourth-highest. (Updated Oct. 4)

GEORGIA, which sold part of its loan fund to help balance its 2011 budget, plans to sell about $975 million in taxable and tax-exempt general obligation bonds through competitive sales tomorrow, to fund projects at more than a dozen state agencies and refund $321 million of prior issues. Georgia, which has $8.3 billion in outstanding general obligations, carries top credit scores from the three major ratings companies. (Updated Oct. 4)

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