California Begins $2.6 Billion Bond Sale After S&P Rating BoostBrian Chappatta
California began selling about $2.6 billion in general-obligation bonds to individual investors, in the state’s first debt offer since it was upgraded by Standard & Poor’s in January.
The issue includes a 10-year tax-exempt portion that is being marketed at a 2.54 percent yield, according to three people familiar with the deal who declined to be named because the prices aren’t final. That interest rate is about 0.7 percentage point above a Bloomberg Valuation index of AAA munis.
The most-populous U.S. state earned its first upgrade from S&P since 2006 after Governor Jerry Brown curbed pension costs, pushed for a voter-backed tax boost and proposed a budget for next fiscal year that projects a surplus. New York-based S&P raised California to A, its sixth-highest rank, lifting it out of a tie with Illinois as the lowest-rated state.
The relative borrowing cost for issuers in the state has been cut in half since the 74-year-old Democrat took office in 2011. The extra yield over top-rated municipal bonds that investors demand to own 10-year debt of the state and its localities was 0.52 percentage point yesterday, the narrowest since November 2008, data compiled by Bloomberg show.
Some portfolio managers in the $3.7 trillion municipal market are wary of adding California securities with spreads down to about half their five-year average.
Craig Brothers, who helps oversee $3 billion of munis as managing director of Bel Air Investment Advisors LLC in Los Angeles, said the state may need to increase yields in some maturities to attract buyers. Yields move inversely to bond prices.
The preliminary yields are “aggressive,” Brothers said in an interview. “I’d be surprised if they don’t end up with some pretty good-sized balances unless they cheapen it.”