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California Takes Initial Orders for 40% of Power Bond Refinance

California took orders yesterday from individual investors for $772 million, or 40 percent, of the $1.9 billion of debt the state is selling this week to refinance bonds issued during its energy crisis almost a decade ago.

Preliminary yields from the first day of the California Department of Water Resources’s so-called retail-order period range from 0.88 percent for a bond maturing in 2012 to 2.80 percent for debt due in 2019, according to data from Treasurer Bill Lockyer’s office. That’s 28 to 36 basis points more than top-rated bonds, according to Municipal Market Advisors 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 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.

Individual investors are placing orders again today before institutions such as insurance companies buy the bonds tomorrow.

“Sounds like they got pretty good reception yesterday,” said Kelly Wine, a senior underwriter at Encino, California-based RH Investment Corp. “Investors realize it’s a solid credit and that it’s separate from the state.”

May 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. During that sale, retail investors bought 42.8 percent of the bonds. Lockyer increased the size of the 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 spread of 45 basis points on the sale date, according to Municipal Market Advisor’s data. A basis point is 0.01 of a percentage point.

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.

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.

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

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, Bud Byrnes, chief executive officer at RH Investment, said earlier this week.

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