U.S. municipals see Calif. utility paper sink

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U.S. municipals see Calif. utility paper sink Reuters Company News - December 28, 2000 10:23

Copyright 2000 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. NEW YORK, Dec 28 (Reuters) - Tax-exempt short-term paper from two California utilities tottering on the edge of default was reoffered to the market with yields far higher than normal on Thursday, reflecting investor adversity to owning the high-risk debt.

The remarketing agent of Southern California Edison offered the utility's daily variable-rate demand notes at a 6 percent yield on Wednesday, according to a money market fund manager.

That was off from the 12 percent yield level that was offered on the debt last Thursday and Friday, but was much higher than the 4.25 percent and 4.35 percent yields seen on California short-term debt, according to municipal market sources.

The sharp jump in offering yields last week resulted from Wall Street remarketing agents not wanting to get stuck holding the paper over the long weekend, said Todd Pardula, a California money market fund manager with American Century Investments in Mountain View, Calif.

Credit rating agency Standard & Poor's last week placed its ratings on Southern California Edison and PG&E Corp. on CreditWatch with negative implications. S&P said both entities are facing imminent default unless California regulators and politicians can immediately craft a viable solution that restores liquidity to the utilities.

On Wednesday, Southern California Edison said it was unable to syndicate a $1 billion revolving credit line and could not remarket commercial paper and other short-term debt instruments.

Pardula estimated Edison has between $500 million and $1 billion in outstanding short-term debt.

Another portfolio manager, Jon Maruya with Imperial Bank in Los Angeles, pointed out that prices may jump again on Thursday and Friday, because not only will remarketers not want to be left holding the notes over the long New Year's holiday, but money market funds that own it will have to publish that fact in year-end reports.

"And that will make investors nervous," Maruya added.

Southern California Edison also has outstanding long-term debt, but it has not traded recently.

Faced with having to pay huge wholesale power prices without being able to pass the cost on to consumers, Southern California Edison has also been shut out of the market for bank loans and short-term debt as well.

Wholesale power prices have skyrocketed in California this year amid allegations that a chronic shortage of electricity has led to "price gouging" by power producers.

PG&E Corp.'s short-term paper is also trading at historically cheap levels.

Pardula noted that while Edison and PG&E are having the most trouble in the debt markets, investors are shying away from San Diego Gas & Electric's notes as well, because market participants consider them, "guilty by association."

However the San Diego Utility, through its Sempra Energy unit, is allowed to pass the rising cost of energy on to its customers.

Aside from the price action in the short-term market, secondary trading of municipal bonds was very light with prices at a standstill Thursday morning, according to market participants.

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-- Martin Thompson (mthom1927@aol.com), December 28, 2000


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