Posted on 09/10/2002 10:10:05 AM PDT by Robert357
Ever since soaring energy prices and rolling blackouts forced California to spend more than $50 billion buying electricity, selling revenue bonds has been the key element in recovering much of that money.--More than 16 months later, however, the largest municipal bond offering in U.S. history still hasn't hit the market. And the state's general fund desperately needs the reimbursement of the $6.6 billion state officials borrowed to keep the lights on.--California's new budget reportedly settled a $23.6 billion deficit, a feat accomplished by assuming money already will be rolling into state coffers next month from three bonds totaling $11.95 billion.
State treasurer Phil Angelides and other state officials say they are just days away from announcing the bond ratings and putting them out for sale. But some market analysts say pending litigation and other details could again delay the bonds.
Further delay would force California to borrow additional money to avoid further cuts in programs and spending in the state with the largest bond debt, said state Controller Kathleen Connell.
"It just puts incredible pressure on the debt profile of the state. That affects, at some point, our credit," Connell said in an interview Friday. "We're already beleaguered with the level of debts we're carrying now."
--snip-- It's crucial for California to get the money as soon as possible, Connell said. The state owes $1.5 billion next month on money it borrowed to fill the bite the energy crisis took out of the general fund, then $3 billion more in November and January respectively.
The state also owes millions of dollars of interest on previous power loans.
The state is working hard on the bonds, said Oscar Hidalgo, a spokesman with the state Department of Water Resources, the agency charged with buying electricity for customers of Pacific Gas and Electric Co., Southern California Edison and San Diego Gas & Electric Co.
But it's "highly complicated and takes a lot of people to put together."
David Hitchcock, director of public finance for rating agency Standard & Poor's, agreed the bonds' complexity has contributed to the delay, as well as a monthslong debate over whom should be paid first with rate money.
The state is counting on millions of customers from PG&E, Edison and SDG&E to pay off the bonds, their interest and the $38 billion California owes energy sellers for long-term electricity contracts.
The state Public Utilities Commission also is considering whether to charge a fee to businesses who chose to leave the utilities and buy cheaper power elsewhere, to prevent remaining customers from having to foot their bill as well.
The money from the bonds would reimburse the general fund and settle a $3.5 billion power-buying loan that has grown by millions of dollars of interest.
State officials still hope for a refund of $9 billion from energy sellers for alleged overcharges; federal energy regulators have dragged their feet on making a decision. They're not sure whether that money would offset the cost for consumers.
Since the state is counting on utility customers for the money to pay bondholders, rating agencies must consider future energy costs, Hitchcock said.
Should costs skyrocket again, the state could be forced to lean even more on customers who already pay among the nation's highest electric rates to make sure bondholders, energy companies and utilities all get their money.
"It adds another level of complexity because you have to analyze the power market rather than just saying you have 'x' number of customers and you have to charge them a certain amount," he said.
--snip-- Regardless, several analysts said California's tax-free bonds likely would be well received by investors because they likely will come with high yields.
"The market has been waiting for the bonds for 18 months," said Zane Mann, editor and publisher of California Bond Advisor, a newsletter monitoring the state's bond market.
"The delays were caused by the stupidity of the people who run our state Legislature and I have no doubt that when they come to market there's plenty of money waiting to pick them up."
(Excerpt) Read more at bayarea.com ...
I love the last paragraph of the article that slams the Legislature! I however, wonder what kind of market reception there will be to these bonds and how they will be backed, especially since the Bankruptcy hearings are not finalized yet (unless a fix is in with the Judge?)
Gosh, I wonder what that will do to the economy of California?
Borrowing money to make interest payments on past borrowing.
Now why does that sound soooooooooooooo bad?
Oh, yeah, that's what third world nations do at the IMF and World Bank.
Very well said!
I am reminded of a comment from the height of the California Power Crisis.....
When the shareholders of Duke Energy Corp. gathered for the company's annual meeting, Chief Executive Richard Priory likened California's business climate to that of a Third World country: "It's no different than if it was Ecuador or Peru and we had investment decisions to make in those countries."
This was taken from the May 6, 2001 Contra Costa Newspapers. They do seem to have some good reporters!
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I don't believe I ever heard how that debate was resolved. If the bondholders aren't the first in line to be paid, I would NEVER buy these bonds. California is NOT guaranteeing their repayment, and Gray Davis would love to hose out of state investors.
The reason I'm still concerned this is a real possibility is because of the statement in the article saying that these bonds have a high yield. Why would that be? Interest rates are low. Could it be because they are risky to buy?
If I remember correctly, the bond funds include a large reserve fund so that if there is a problem with the revenue stream coming into the bond funds, then the investors will have some money with which to continue to make payments, while they file litigation. I really expect that Wall Street will do its job on this and that the bond holders will have multiple layers of protection----assuming that the bonds are ever issued, which may still be in doubt. Although if that happens California has a real financial crisis, but they will have a financial crisis anyway.
Why would they be especially high yield bonds if someone did not consider them high risk?
D
Well they could be high risk or they could have significant uncertainty within them.
For example, they could have a lot of provisions that allows them to be called prior to the normal term under a variety of conditions that may happen (probably not considering how low interest rates are now.) The bonds could have a lot of deferred principal payments until a few years out, which would drive up their yeild.
Whatever the reason, it will be interesting to see what kinds of clauses the bonds have within them. No matter what, we can say that since they will be tax exempt to federal and California state income taxes (except to the tune that the min alternate tax catches someone), they will be more popular with California individuals and corporations wanting to shelter some of their income.
It would take a high interest rate, indeed, for me to buy a bond if I thought I might have to SUE to collect my interest and principle. Like maybe 300%.
No thanks. I notice a pattern that whenever anyone does business with Gray Davis, they end up poorer and he ends up richer.
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