New York Beats California in Sales for First Time: Muni Credit
Wall Street’s home state and its local governments are on a pace to sell more debt than their California counterparts for an unprecedented second straight year, according to Citigroup Inc. (C) data starting in 1991. The relative shortage of securities from the most-populous state is fueling gains that are beating the rest of the tax-exempt market.
California issuers were the top sellers in every year but 1998 until Governor Jerry Brown, facing $25 billion of budget deficits, cut general-obligation sales to $11.5 billion in 2011 and 2012, the smallest two-year total since 2006. New York and its cities and towns, by contrast, are offering more as yields close to the lowest since the 1960s spur refinancing as well as borrowing for repairs to aging infrastructure.
“From a New York perspective, there are capital needs that need to be addressed and less hesitancy to enter the market,” said Howard Cure, head of research at New York-based Evercore Wealth Management LLC, which manages about $3.5 billion.
This year, New York issuers have offered about $26.1 billion in long-term, fixed rate debt, to $22.7 billion for California, data compiled by Bloomberg show. In 2011, New York sales totaled $33.8 billion, compared with $31.7 billion for the world’s No. 9 economy.
Securities of Golden State issuers have earned 6.5 percent this year, beating the broader muni market’s 5.8 percent advance, according to Standard & Poor’s total-return data. Meanwhile, New York’s 5.2 percent return trails 16 of 27 U.S. states and territories tracked by S&P.
“There’s a risk that New York’s total returns could be lagging the broader market just because of the potential for more supply,” said Michael Pietronico, who oversees $770 million of munis as chief executive officer of Miller Tabak Asset Management in New York. “That’s going to be something that might be more of a problem for investors in terms of total returns should interest rates begin to move forcefully higher.”
California, the lowest-rated state by S&P, is also drawing investors willing to take more risk as muni interest rates sink amid a fixed-income rally. California’s A- rating from S&P is seventh-highest, and four grades below New York’s.
The extra yield investors demand to hold California issuers is below the average since Brown, a 74-year-old Democrat, took office in January 2011. The yield spread for 10-year local debt from California is about 0.93 percentage point above top-grade municipals, compared with the 1.11 point average since the start of 2011, data compiled by Bloomberg show.
The New York Thruway Authority, operator of the longest U.S. toll road, sold $1.1 billion of bonds last month for highway improvements, data compiled by Bloomberg show. The New York Metropolitan Transportation Authority issued a combined $1.9 billion in the past month, some of which went to refund high-cost borrowings.
California may yet regain its spot as the top issuer. Brown won lawmakers’ approval this month to sell $4.75 billion in debt for a high-speed passenger rail line. Voters also are scheduled to decide on $11 billion of water bonds in 2014.
Brown has proposed solving California’s perennial budget deficits in part by raising the state sales tax and boosting income taxes for some residents. Voters will decide on the plan in November.
California municipalities may be reluctant to issue debt without knowing how the tax boosts will play out as they deal with declining home prices, said Cure at Evercore.
From the time Brown took office through the first quarter of this year, housing prices dropped 5.6 percent, according to the Bloomberg Economic Evaluation of States. In that same period, state tax revenue grew 1 percent, compared with 8.5 percent in New York.
In California, “with the declines in assessed property values, there may be more hesitancy to enter the market,” Cure said.
In the past month, three California municipalities decided to seek bankruptcy, including Stockton. With 292,000 residents, it’s the largest U.S. city to do so.
“There’s a lot of demand for New York paper,” said Matt Dalton, who manages about $1 billion in munis at Belle Haven Investments Inc. in White Plains, New York. “It’s not necessarily the supply, but also the quality. New York issuers are generally in better fiscal shape than those in California.”
Following are pending sales:
MINNESOTA plans to borrow about $659 million of general- obligation debt through competitive bid as soon as Aug. 7, data compiled by Bloomberg show. The deal includes $234 million of debt repaid with motor-vehicle taxes, according to bond documents. S&P rates the state AA+, its second-highest grade. (Added July 26)
REGENTS OF THE UNIVERSITY OF CALIFORNIA plan to sell about $920 million of revenue bonds, including $100 million of taxable debt, as soon as today, according to data compiled by Bloomberg. Proceeds will help finance student housing and parking and refinance debt, according to bond documents. Moody’s Investors Service rates the bonds Aa2, third-highest. (Updated July 26)
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