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10/23 18:21
California Offers 1.8% 1st Yield on Adjustable Bonds (Update2)
By Dennis Walters
Sacramento, California, Oct. 23 (Bloomberg) -- California's $4.25 billion in adjustable-rate bonds, part of the biggest municipal sale in U.S. history, drew more orders than investment banks could fill by paying more than alternate investments.
The 1.8 percent yield on the adjustable-rate portion applies from January to March before rates begin resetting weekly and daily. The initial rate also applies to bonds that will eventually set yields through auctions every 35 days. The adjustable-rate offering sold out ``within a few hours of coming to market,'' state Treasurer Philip Angelides said in a statement.
The yield lured buyers because it's higher ``than the comparable Treasury rates'' and municipal debt with those maturities, said Todd Pardula, who oversees about $720 million in two California tax-free money market funds. Treasury bills yield about 1.67 percent for those maturities, said Pardula, who bought some of the bonds.
A 1.8 percent tax-exempt yield translates into a taxable equivalent return of 3.23 percent for a California resident in the top federal and state tax brackets.
California's Department of Water Resources sold the debt today, part of a plan to offer $11.9 billion in bonds to repay state and bank loans for energy purchases last year. The balance of fixed-rate debt is scheduled for sale during the week of November 4.
Overall Savings
The initial interest period lowered rate risk by avoiding ``really long maturities and it came at an attractive yield'' of one-tenth of a percentage point more than munis with similar maturities and guarantees, said Kevin Shaughnessy, who helps oversee $21 billion of money market investments for Charles Schwab & Co., including $6.7 billion in a California fund.
A one-tenth of a percentage point premium on today's record sale translates into $4.25 million of added annual interest expense for a borrower.
The water department is still saving money because the 1.8 percent today compares with more than 5 percent the water department has paid on its state and bank loans for water purchases. A yield reduction that large, assuming the adjustable rate stayed at that level, saves $144 million in interest expense annually compared with a 5 percent expense.
Oversubscribed
Investment banks received $5.2 billion in orders, ``a great statement of confidence by the market'' in the power plan, said Peter Hill, head of public finance at J.P. Morgan Chase & Co., which managed the adjustable-rate bonds with a Lehman Brothers Holdings Inc. unit.
A majority of orders from the more than 40 institutions that bought the debt came from California money market and bond funds, Hill said. Corporations and individual investors also bought the auction rate portion, he said.
The adjustable-rate offering was delayed by a day after PG&E Corp.'s Pacific Gas & Electric filed a lawsuit last week that questioned a plan for using utility revenue to repay the bonds. The delay allowed banks and bond insurers, which are backing the adjustable-rate debt, review the suit. The prospectus for the sale had disclosed the risk that the suit may be filed and has been amended to note the actual complaint. The adjustable-rate debt is top-rated because of the guarantees.
Utility Revenue
California's water department began buying power in January 2001 after Pacific Gas and Edison International's Southern California Edison became insolvent purchasing electricity for than state law allowed them to charge customers. A portion of revenue from those utilities and a unit of Sempra Energy will repay the bonds.
Investors said today's sale also needed a yield cushion because of concern interest rates may rise by January, lowering the value of existing bonds. One measure of tax-exempt floating- rate debt, the Bond Market Association Municipal Swap Index, rose to 1.76 percent at the latest weekly adjustment, up from 1.5 percent. It has averaged 1.42 percent over the past year.
California's budget-related notes that were sold earlier this month have been offered in the secondary market to yield 1.77 percent and they mature in June, later than today's initial interest rate period, Pardula said.
Financial Security Assurance Holdings Ltd., a unit of Belgium's Dexia SA, insured the most adjustable-rate bonds, $600 million, followed by a unit of Bank of New York Co. that provided letters of credit. The guarantees ``made the approval process quite simple'' for investors, Shaughnessy said.
`Important Day'
The $4.25 billion equals one-eight of all the adjustable-rate muni debt sold in all the U.S. during the first nine months of this year, according to Thomson Financial data. Today's sale also surpasses the biggest muni sale of $3.4 billion by the Long Island Power Authority in 1998.
The water department's sale, once planned for 13 months ago, was delayed as state regulators debated a plan for repaying the debt. The bonds are being repaid over 20 years to cushion the blow of surging wholesale-power prices in early 2001.
``This is an important day for California as this bond sale begins to repay the state for costs incurred during the power crisis,'' Angelides said.
The water department is still saving money because the 1.8 percent today compares with more than 5 percent the water department has paid on its state and bank loans for water purchases.
The rate last week was 1.74%, so maybe the PG&E suit did have a small effect. Now on the 5% figure, that was the original interest rate on the RANS, I think. But the rate was bumped up to 7.5%, then 9% [I think], when they weren't paid off on time. Sloppy reporting, as usual.