California shouldn't have any trouble selling $10 billion in
short-term debt this week, market participants say, despite the state's
well-known budget troubles.
California's "revenue anticipation notes", which will mature in May
and June of 2013, are expected to offer yields between 0.40% and 0.55%,
which exceeds other short-term debt options that yield closer to zero.
The state's notes also have top-tier short-term ratings from Moody's
Investors Service, Fitch Ratings and Standard & Poor's, making them
an option for money market funds, which are limited in the types of
securities they can buy, as well as ultra-short-duration muni funds.
Despite California's budget woes, "these notes will pay, and the yield
is better than zero," said Blake Miller, managing director at Neuberger
Berman, which has more than $10 billion of muni assets under
management.
Mr. Miller also added that since California's note deal is so large,
it will be very "liquid," or easily tradeable, making it attractive for
bigger buyers. He declined to comment on whether his firm planned to
purchase any debt from California's latest offering, which will be
offered to individual investors Tuesday and Wednesday, followed by a
final pricing for institutional buyers on Thursday.
Revenue anticipation note, or RAN, deals are fairly common in
municipal finance. Such notes typically mature within a year and are
generally issued by states to raise cash ahead of incoming taxes or
other revenues, smoothing out any seasonal mismatches between when money
is received and spent.
California last sold RANs in September, when it issued $5.4 billion of
them. The state sold $10 billion of RANs in 2010. The notes are
repayable through California's $93 billion general fund, after "priority
payments," such as money for schools, the state's other debt service
and retirement contributions, are made.
Last year, the state's RANs yielded 0.38% for a May 2012 maturity and
0.40% for a June 2012 maturity, more than a full percentage point lower
than where the state sold similar notes in November 2010. At that time,
a May 2011 maturity yielded 1.50%, while a June 2011 maturity offered
1.75%.
Steven Shachat, who manages about $2.2 billion in assets through the
Alpine Municipal Money Market Fund and the Alpine Ultra-Short Tax
Optimized Income Fund, said while he thinks the California note deal
will likely be popular with other investors, he wasn't planning to
participate.
"Considering the size of the deal and everything that is happening in
California, I would like to see more yield" than 0.40% to 0.55%, he
said. Since the state is borrowing nearly twice as much as it did in
RANs last year, California "is obviously not swimming in money ... and
we've seen a few isolated bankruptcies there," he said, referring to
recent Chapter 9 filings from three California cities: Stockton, Mammoth
Lakes and San Bernardino. "I want to be compensated accordingly."
Others, like Craig Mauermann, who manages the $850 million BMO
Tax-Free Money Market Fund, said his participation depended on if yields
on the deal were closer to 0.55%, the bigger end of the range where the
state may price this week's notes.
Mr. Mauermann said he thought it was encouraging that California
passed its budget on time, and that its budget deficit, at roughly $16
billion, wasn't as big as it was a few years ago, when it exceeded $20
billion. Still, closing the state's budget gap relies in part on a tax
increase that California voters will consider in November. If the
measure fails, automatic cuts will be triggered.
"We really think the state is in much better [financial] shape than a
few years ago," Mr. Mauermann said. But if the tax increase doesn't
pass, "you have to worry about headlines," which could hurt the price of
the state's notes. A 0.40% yield "is not enough to be dealing with that
possible [negative] headline," about California's budget, he said.
-Write to Kelly Nolan at kelly.nolan@dowjones.com
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