The US state of California on Wednesday said it would restructure upcoming bond issues as it tries to raise $14 billion in the middle of a sell-off in the municipal bond market.
The decision to shift more of the sale to a government-subsidized market for municipal bonds would lower the cost of the new debt. This follows other local borrowers who have delayed or downsized bond deals in a market downturn that has produced some of the largest one-day rises in yields on “munis” since the height of the financial crisis.
At the heart of the gloom is both the recent rise in US Treasury bond yields and the looming expiry of the Build America Bonds (BAB) program, which has buttressed the $2,800 billion market where states and municipalities have raised money since the financial crisis.
Most munis offer tax breaks that make the bonds attractive largely to wealthy US individuals. In an effort to ease credit to muni borrowers after the crisis, the federal government introduced the BAB program to subsidize taxable debt to attract a wide range of institutional investors.
The BAB program expires at the end of the year. This has resulted in wave of issuance and concerns about how the traditional market will fare under the renewed weight of the full borrowing needs of states and municipalities at a time when local governments are still under pressure from the recession.
California’s latest spate of borrowing – it is the largest issuer of state debt in the US – started a week after news of new projected budget deficits of more than $25 billion in this fiscal year and the next
The state on Wednesday said it would cut the size of a sale of traditional tax-exempt bonds by $750 million to $1 billion, shifting the borrowing to a planned sale of taxable debt, which will price on Friday. Of the $2.75 billion of taxable debt it is now selling, some $2.5 billion will be BABs. The tax-exempt bonds price next week.
Tom Dresslar, spokesman for Bill Lockyer, the state treasurer, said the tax-exempt municipal bond market was a “a cold, cold world right now for issuers and taxpayers”.
“In an environment where tax-exempt yields keep rising, it’s in taxpayers’ best interest that we cut the tax-exempt offering and increase the savings we can achieve with subsidized BABs,” he added.
Due to market conditions, California also scrapped a $267.3 million tax-exempt lease revenue bond sale it planned to price next week.
The state also said it has received orders for $6.06 billion, or about 61 percent, of a $10 billion sale of revenue anticipation notes, or Rans, after it extended the marketing period to retail investors by one day.
California attributed the delay to a lawsuit filed on Tuesday that challenges a plan to sell and lease back from private owners 24 state buildings, threatening to rip a $1.2 billion hole in the most recent budget.
The sale of Rans is an annual event that allows California to bridge the gap to its spring tax seasons. Last year’s sale of the short-term notes, which are due in May and June, drew retail orders topping 75 percent of the $8.8 billion sale.
“Given the hostile market forces, 60 percent-plus retail demand is pretty impressive,” Mr Dresslar said.
The Ran sale opens to institutional investors and prices on Thursday.