High-Yield in California Gives Governments BonanzaJames Nash
California’s rebounding finances are drawing investors to the riskiest debt of the world’s ninth-largest economy, buoying prospects for a revival in bond sales by its blight-fighting organizations.
The successor to the San Francisco Redevelopment Agency sold $123 million of debt last week, a year after lawmakers abolished the issuers. The offer marked the first new bonds to back a redevelopment project since all of the more than 400 authorities were eliminated as part of steps to balance the state budget. The securities are unrated, placing them among the most default-prone local obligations.
With the state poised for its first surplus in almost a decade and muni yields close to 47-year lows, some investors are turning to riskier California bonds. U.S. high-yield local bonds have gained 1.3 percent this year, double the investment-grade return, Standard & Poor’s data show. Debt of former redevelopment agencies is also rallying, fueling demand for San Francisco’s sale and raising prospects other cities may follow.
“People are more comfortable that this type of debt is going to pay,” said Bill Black, Oakbrook Terrace, Illinois-based co-manager of the $7.3 billion Invesco High Yield Municipal Fund, which bought some of the issue. “There’s also a demand for high-yield debt, particularly in California.”
The most-populous state had its bond rating raised by S&P last week for the first time since 2006 as the revenue outlook improves for the home to companies such as Apple Inc. and Facebook Inc. The fourth-biggest crude oil producer among states has also seen home values rise more than the national average in the past year, according to Zillow Inc. data.
Under California’s redevelopment program, municipalities formed taxing authorities that issued bonds to improve blighted areas and repaid them with levies on property values enhanced by the projects. The local authorities had nearly $30 billion in debt as of June 30, 2010, the state controller said.
Governor Jerry Brown, a 74-year-old Democrat, and legislators eliminated the agencies effective Feb. 1, 2012, to divert about $1 billion to schools. Brown signed a bill last year clarifying that cities and counties taking on obligations of the former agencies could issue debt to fulfill contracts with developers.
San Francisco’s agency had entered into a contract to redevelop rail yards, according to a staff report to the oversight board of the successor agency. The project includes housing, a medical center, a police station, offices and biomedical laboratories. It represents $9 billion in new investment in the city, according to the report.
The issuer last week was the Successor Agency to the San Francisco City & County Redevelopment Agency. The tax-exempt securities included bonds maturing in August 2022 and priced to yield 3.54 percent, data compiled by Bloomberg show. The yield was about 1.9 percentage points higher than on AAA munis, Bloomberg Valuation data show.
The sale may open the door to other cities, Black said.
“From an investor’s perspective we feel that the sale was successful and should be conducive for more debt sales with issuers that are in a similar position,” he said in an e-mail.
Still, unrated bonds are riskier than most local borrowings. About 4 percent of such munis are in default, compared with 0.1 percent of rated bonds, said Matt Fabian, managing director of Municipal Market Advisors in Concord, Massachusetts. On a par basis, about 92 percent of munis are rated, he said.
For investors willing to take the risk, the extra yield is appealing given the rally in lower-rated local debt. Ten-year securities rated BBB, or two levels above junk, yield about one percentage point above top-rated munis, close to the smallest difference since 2008, data compiled by Bloomberg show.
Holders of securities issued by redevelopment agencies before their elimination are benefiting from a rally in California debt.
Federally taxable San Jose redevelopment bonds maturing in August 2035 traded this week at an average yield of about 5.95 percent, data compiled by Bloomberg show. That was about 2.9 percentage points more than similar-maturity Treasuries, according to BVAL analysis.
The difference is down from about 3.5 percentage points early last year. Moody’s Investors Service rates the bonds one level below investment grade.
Last week’s offer will reimburse the developer for public improvements such as streets and utilities. Unlike redevelopment bonds repaid through taxes on enhanced property values, the San Francisco debt is funded through three special districts that have been collecting taxes on property since 2002.
Such entities are common in California and levy taxes based on the size of parcels rather than assessed value, said Catherine Reilly, manager of the San Francisco project. The three San Francisco districts will collect taxes on properties until 2050 or the improvements are paid off, whichever comes first, Reilly said in a telephone interview.
Investors probably were reassured by the familiar repayment mechanism, Reilly said. At the same time, she said a limited number of cities and counties will be able to replicate San Francisco’s model. Under California’s tax-limiting Proposition 13, two-thirds of residents within the proposed area must vote to form such a district.
In trading yesterday, yields on benchmark munis due in 10 years were little changed at 1.83 percent after the biggest weekly jump since December, Bloomberg Valuation data show.
Following is a pending sale:
SANTA CLARA COUNTY in California plans to sell $490 million of general-obligation bonds as soon as Feb. 7 via competitive sale, according to data compiled by Bloomberg. (Added Feb. 4)