Investors sidestep Calif. woes to buy $1 bln bonds

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Investors sidestep Calif. woes to buy $1 bln bonds Updated: Tue, Jun 12 4:16 PM EDT By Chris Sanders

NEW YORK (Reuters) - A $1 billion California bond sale Tuesday was quickly scooped up by investors, who ignored for now a power crisis with no end in sight, a weakening state economy and a slew of credit rating downgrades.

Merrill Lynch & Co. sold nearly 85 percent of the general obligation bonds even before it had competitively bid on the deal, luring investors in with higher interest rates meant to assuage concerns about the state's economy.

"It's probably the best subscription we've had, and we bought seven of the last 12 sales," for the state, said David Andersen, a managing director and the head of municipal underwriting at Merrill Lynch.

"Buyers saw a lot of value, other Aa3 credits in the state don't pay as much yield," Andersen added, pointing out that at today's yields, "this is the cheapest the state has traded in the last five years."

Many California-based market participants continue to have confidence in the state economy over the long run.

"It's still the sixth largest economy in the world," said Clark Stamper, a portfolio manager with Stamper Capital & Investments in Santa Cruz, Calif.

California's energy crisis forced the state treasurer to spend $7 billion through the end of May buying electricity on the spot market, selling it at a lower, fixed rate to retail customers as required by the state's mismanaged deregulation plan.

Meanwhile, the overall state economy is struggling under the combined forces of a weaker U.S. economy and the concurrent technology slowdown, pulling down tax revenues.

ENERGY CRISIS COMES INTO PLAY

In May, the state warned that revenues in fiscal 2001 to 2002 will be down $3 billion, due in part to a precipitous drop in collections from stock option income and capital gains taxes.

Collections from those two Silicon Valley-entwined tax bases came in at $18 billion in the 2000-2001 fiscal year, but are expected to fall to $12.4 billion in fiscal 2001-2002, according to the state's Department of Finance.

When the state revised its revenue estimates in May, however, many investors questioned the assumptions of only a one-third drop in revenues despite a much larger drop in the equities markets overall.

After a two-notch downgrade in April, Standard & Poor's rates California's bonds single-A-plus, but warned on Monday that it will downgrade the general obligation bonds again unless the state can find solutions to its energy crisis.

Moody's Investors Service cut the rating one notch to Aa3 from Aa2 in May, echoing S&P's sentiments and adding that it will be watching closely for a balanced budget.

Both agencies said the planned sale of $12.5 billion California Department of Water Resources power purchase bonds will be a key ingredient to recovering the $7 billion taken from the general fund to purchase power.

"I still think we are going to have a really nasty recession, but if California cannot pay its bills ... it's not just California that is in trouble, it will be the rest of the states and the rest of the world," Stamper said.

Stamper said he and others thought the bonds were expensive, which is good for California because it means the state received a relatively low interest rate to borrow money.

Bonds due in 30 years were priced with a 5.125 percent coupon to yield 5.45 percent.

Eighty percent of the buyers were institutional investors including traditional buyers like mutual funds and property and casualty insurance companies, with individual investors buying the rest of the bonds in the early selling.

Steve Galiani, a senior portfolio manager with Wells Capital Management in San Francisco, said he did not buy the bonds, citing the possibility of "further credit deterioration" that would pull prices even lower, making now an inopportune time to buy state debt.

Galiani also said he "doesn't believe all of the bonds are in strong hands," meaning the bonds may make their way back into the market over the next few weeks.

http://news.excite.com/news/r/010612/16/markets-california-bonds



-- Martin Thompson (mthom1927@aol.com), June 12, 2001

Answers

By the time the big bond issue hits the market in late summer they should be really deep-discount.

-- JackW (jpayne@webtv.net), June 12, 2001.

" . . . if California cannot pay its bills ... it's not just California that is in trouble, it will be the rest of the states and the rest of the world,"

This statement reflects the fact that California should be regarded as "too big to fail". As the world's sixth largest Economy, the insolvency of California's State government (which still appears very probable) will trigger an awesome Chain Reaction of debt defaults that will reverberate around the entire WORLD. This is exactly the "Cascading Effects" scenario that Y2Kers were so worried about in 1999.

-- Robert Riggs (rxr999@yahoo.com), June 13, 2001.


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