Posted on 09/29/2002 10:45:52 AM PDT by Robert357
Edited on 04/13/2004 2:41:04 AM PDT by Jim Robinson. [history]
For California investors, the state's $11.9 billion energy bond issue will be like a circus elephant walking through the front door: too big to ignore, kind of scary but maybe worth a ride.
The bonds won't be priced for several weeks, but experts say they should offer attractive yields to make up for their substantial risk and the boffo size of the deal, which will be 3 1/2 times bigger than the previous record municipal bond issue.
(Excerpt) Read more at sfgate.com ...
Got to love the lead two paragraphs!
For California investors, the state's $11.9 billion energy bond issue will be like a circus elephant walking through the front door: too big to ignore, kind of scary but maybe worth a ride.
The bonds won't be priced for several weeks, but experts say they should offer attractive yields to make up for their substantial risk and the boffo size of the deal, which will be 3 1/2 times bigger than the previous record municipal bond issue.
Win one for the Gipper! God Bless You Reagan, We Will Never Forget Your Great Service and Leadership - We here on FR will carry on your great work with diligence. Thanks for the Memories and Inspiration!
The voters have a habit of saying no to the average bond issue. They most likely will say no to these monsters as well.
What happens if California is forced to default on it's previous bond committments? What happened when Washington defaulted on the "energy" bonds you mentioned yesterday?
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Tax-free bond funds brimming with record cash
Investors weary of the stock-market roller coaster are turning to munis.
Safe-haven municipal bond funds are soaking up cash at the greatest rate since 1993, aided by weary stock investors disgusted with corporate skulduggery and seeking less-volatile alternatives. Once viewed as a stodgy investment for older Americans, tax-free municipal securities - with after-tax returns of 10 percent and more for residents in high-tax states like New York and California - have become the most compelling of all bonds for many investors. "It's a flight to quality. People are more concerned with a return of principle than a return on principle," said Chris Swantek, a municipal portfolio manager with National City Investment Management in Cleveland, Ohio. Through Sept. 18, $18.9 billion flowed into open-ended municipal bond funds that require a large up-front investment and are more actively managed, according to AMG Data Services. The year-to-date inflows easily eclipsed the whole of 2001, when municipal funds grew by $16.9 billion. But that's still not as high as the last blowout year in 1993 when tax-free funds drew $29.6 billion in cash, the Arcata-based mutual fund research company said. Franklin Templeton, the largest municipal bond fund manager in the world, saw its tax-free assets grow by $2.8 billion between August 2002 and the same time last year. Closed-end municipal funds, which are less actively managed and trade on exchanges at affordable prices, beat last year's nine-year record of new offerings by $200 million on Thursday. John Nuveen & Co. took it over the top by announcing $331 million in initial public offering shares sold in five new closed-end muni funds, bringing 2002's total to more than $5.8 billion. "There's a lot of money in motion," said Bill Gillen, the national sales manager at Eaton Vance Distributors Inc. in Boston, which sold more than $1.35 billion in three new muni funds in August. "People are actively reassessing their tolerance for risk and rebalancing their portfolios." It didn't hurt that Eaton Vance's 30-day offering period followed a rotten month for stocks - July. Gillen said his funds will buy only insured bonds, giving investors an added sense of security on already safe municipal bonds. When offered, Eaton Vance told investors its insured national portfolio would pay a final yield of between 6.05 percent and 6.25 percent. Those yields would need to rise to between 9.3 percent and 9.6 percent on a comparable taxable bond to equal the muni fund on an after-tax basis for investors in the 35 percent tax bracket. While Nuveen is the heavyweight in the market, competitors like Eaton Vance, Neuberger Berman, Pacific Investment Management Co., Alliance Capital Management and Blackrock Inc. jumped in to snare some of the stock-weary dollars for themselves. "Investors are going into things they perceive to be less volatile, more conservative investments," said Ed McRedmond, a closed-end fund analyst with A.G. Edwards & Co. in St. Louis. Several more companies are studying selling closed-end funds this year, McRedmond said. Closed-end muni funds use leverage to offer returns as much as 1.5 percent higher than open-ended funds. Leverage allows the fund to borrow cash in the short-term market to buy long-term debt, thereby increasing the amount of investable cash in the fund. But investors shouldn't expect the good times to last forever. McRedmond warned that in the years following strong inflows, municipal bonds often falter. "It makes you nervous when you see a lot of flows going into a particular asset class. History shows that when you see big inflows into fixed-income - that tends to be a contrary indicator over the next couple of years." And with the use of leverage, closed-end fund returns will fall more quickly in a rising interest rate environment. Bond yields are at record lows, and eventually they will begin to rise, cutting into returns from the billions in bond investments made this year and last, McRedmond said.
They are being sold on the basis of not requiring a vote to authorize. They are revenue and not general obligation bonds.
What happens if California is forced to default on it's previous bond committments?
These are not a full faith obligation of the state of California, they are an obligation only against a specific revenue stream of DWR based on retail power sales revenues collected from three investor owned utilities customers. There is a higher lean against the revenues to certain power sellers over the bond lenders under certain cirumstances. There is no claim on other DWR revenues.
I would further suspect lots of lawsuits. Because Moody's gave the bonds A3 rating, I would suspect Moody's would be at the center of the litigation. From their analysis, which relied upon formal legal opinons rendered by the California State Attorney General and by the attorney for the CPUC, I would suspect that California's general fund would be targeted by the litigation as well.
What happened when Washington defaulted on the "energy" bonds you mentioned yesterday?
Washington state has never defaulted on anything. The Washington Public Power Supply System (WPPSS), which was composed of a number of member utilities and a separate municipal corporation within the State of Washington did default on bonds associated with nuclear projects WNP4&5 located in Richland, WA and Satsop WA respectively. WPPSS, now Energy Northwest, did not default on WNP 1, 2, or 3 bonds which were also outstanding.
The result of the default was that the utility members of WPPSS had to pay significant interest penalties on borrowings from the bond market for several years and that some were totally denied credit for a year or so because of litigation. They also paid a lot of money to attorneys. WPPSS changed its name and has issued refunding bonds on WNP 1, 2,& 3 at lower interest rates. It has as of recently been involved in the construction of some wind turbines power plants and was involved in a developer combined cycle gas turbine project that has been canceled by the developer (Duke).
I hope that helps answer your questions.
Most states are also cutting back on sharing of tax revenues to cities, counties, and grants to special service districts (water, flood control and sewer districts). That in turn is causing those public agencies to go to the bond market.
Investors who are interested in municipal tax exempt bonds are going to have a near infinite choice of offerings. That is why the Cal power bonds have so many options. Terms from 2 to 20 years, taxable, tax-exempt& insured, tax exempt and variable interest rates, etc.
In that these bonds are to be paid from a revenue stream that is uncertain is what has caused problems. Getting the CPUC to agree to raise rates so that their may be a source of revenues was a huge hurtle. Then there was and is all the power litigation.
Finally as S&P clearly states there are the politics of California.
Since this is one of the largest public sector bond issues in history, and since there are lots of other tax-exempt bonds being issued, will there be enough of a market to absorb all the power bonds. From an economics perspective the answer is yes, if the yeild is great enough or no if the yeild is not great enough.
This should be interesting to watch. Davis, the Treasurer, the Controller, and the state budget playing chicken with Wall Street.
These particular bonds ultimately create an additional indebtedness for a select group of rate payers at the sole discretion of the executive of California but litigation may well force the California general fund to join in underwriting these bonds because of misrepresentation on the part of the executive.
The consequence of the default in Washington was short term (<10 years), bonding restrictions and penalities placed upon the issuing entities.
Question. If the consequences of the litigation you suspect are as you have predicted and the obligation is shared by the general fund, is not the nature of these financial vehicles then illegal under existing California Code? More broadly, can the California judicial implement a tax not originated in the legislature?
Will the federal judicary allow the California executive to accomplish what appears to be an end run around PG&E's bankruptcy filing?
To me that is a really interesting question. What I was stunned to read in the Moody's analysis, was that Moody's has gotten some legal opinions that says yes the fed bankruptcy court will defer to California regulations.
When I read the Moody's A3 bond rating report, I find that the Moody analysts have a legal opinion on file for just about all of their concerns. I suspect that Moody's can then say that they relied upon state of California officials and upon bond council for the State and if there is a problem with the bonds, it is not the fault of Moodys. Personally, I don't know, although my dad was a trustee for many bankruptcy proceedings and he always felt that the judge could pretty well do what he wanted. I was surprised how firmly Moody's addressed this risk and dismissed it.
S&P, on the otherhand, took a much more old fashioned report to evaluating the bonds, they looked at the money, the willingness to raise rates, the funadmentals of if higher rates could be paid, and the likelihood that the chain of events that the bond payments are based on is likely to happen. They gave the bonds BBB+
Yes, you pretty well understand what I was saying with a few exceptions.
The indebtedness for a select group of ratepayers is not at the sole discretion of the executive of California. The indebtedness has many more fingerprints on it; Attorney General, Treasurer, Controller, Legislature, DWR, and CPUC. While the Gov has the ability to appoint and fire many of the leaders of DWR and CPUC, others also responsible for the bond issue are elected by the people.
As to the legality of the bonds, I am sure that the Attorney General has rendered an opinion that says the bonds and covenants are legal as they are now written. Whether that opinion may at some point in the future be found to be at odds with a court ruling is a matter for speculation.
I found Moody's defense odd in that their counsel essentially felt that the feds would allow California to unilaterally manipulate PG&E's indebtedness after a restructuring plan had been established and approved.
In fact, this bonding activity, if condoned could be repeated in future years. This was even more curious because the events (Cal Power Crisis) that percipitated the debt (bond service fees) occured before the filing, was outside the control of the utility and was a result of the utility then operating essentially within the constraints of the prescribed codes in good faith.
I also find the whole Moody's perspective to be odd in regards to the way they ranked these bonds and the kind of analysis they did.
You are right in that the statements about the federal bankruptcy court deferring to the state regulations was strange.
Your bring up a very interesting point and that is that stockholders and PG&E were operating under a code of good faith and there was a implicit agreement between them and the State CPUC. The CPUC should have allowed PG&E some rate relief during the power crisis, but they refused until bankruptcy was the only option. I know that some Utility Commissioners in the State of Washington have been threaten with legal action if they decrease the value of a company by "unfairly refusing to allow rate increases that are in line with increases in costs." The entire deregulation legislation is something that changes things, but still, some stockholders might consider litigation for lost value of ownership shares.
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