The state of California will price a $2.5 billion new money and refunding general obligation bond deal right after Labor Day weekend in the first big deal to start its regular fall bond sale calendar.
California typically prices debt in big chunks in March and April, after the release of the governor’s budget proposal in January, and then again from September through November after the budget is signed July 1.
“The process is connected to the budget, but not entirely driven by the budget,” said Tim Schaefer, deputy treasurer for public finance.
Schaefer and Blake Fowler, director of the treasurer’s public finance team, described how they set the fall slate in an interview.
The state’s Department of Finance surveys all of the departments to find out what their construction needs are. Then Fowler’s team reviews what existing bond proceeds each department may have available to cover construction costs, and which ones might need more cash.
His team also determines what bonds might need to be taxable or tax-exempt and how each deal should be broken down to achieve level debt service, and then the plan Fowler and his team craft is presented to Treasurer Fiona Ma for her approval.
Retail order pricing begins Wednesday and institutional sales are planned for Thursday, Sept. 8, for the two tranches of $1.3 billion in new money debt and $1.2 billion in refunding.
Barclays is joint senior manager with UBS Financial Services Inc. Co-senior manager is Piper Sandler & Co. The trio head a 30-bank syndicate.
While a 30-bank syndicate may seem large, the state has had a “similarly-sized syndicates previously when they have had very large transactions of this size,” Fowler said.
“Not every firm in the underwriting syndicate will have the same reach geographically or by investor,” Schaefer said. “The goal is always to make the underwriter syndicate comprehensive, so that we can reach the fullest part of the market.”
For instance, “some underwriters would be stronger with mutual funds than they are with insurance companies, others have more strength with high net accounts versus middle market accounts,” he said. “We try to cobble it together so we can achieve as many investors [with eyes on the deal] as we can.”
The state also has a mandate to sell bonds competitively, unless the deal is going to be so complex that it would benefit from having the bonds sold in a negotiated deal, Schaefer said, adding that this deal qualifies.
The various purpose general obligation bonds will cover costs for a whole host of construction projects across the state. The categories include higher education, high speed rail, children’s hospitals and water projects. The refunding bonds would refinance bonds the state issued in 2012 at 5% coupons.
After the big GO deal, the state has $250 million in water revenue bonds set to sell competitively Sept. 13, followed by $500 million in California Earthquake Authority revenue bonds the week of September 25, $150 million in Veterans GOs pricing Oct. 4, and $90 million in Department of Veterans Affairs Home Purchase Revenue Bonds Oct. 18. It also has a second taxable GO and tax-exempt refunding in the works with dates to be determined.
The offering documents take note of the state’s revenue windfall of the past two years, mentioning that the 2022 Budget Act includes $37.2 billion in reserves; and also generally that the state’s economy accounts for nearly 15% of the U.S. gross domestic product in 2021.
Though much has been made of the state’s declining growth patterns, it is still on track to hit 43.5 million residents by 2060, according to offering documents. The state’s population exceeds that of Canada and Australia and its economy has long rivaled that of some countries.
Though rating agencies have made mention of the state’s habit of producing late audited comprehensive financial reports, it hasn’t impacted the ratings.
Comments from analysts have generally been along the lines of whether the state has the strength and qualities for further rating boosts, rather than the likelihood of a downgrade.
S&P Global Ratings, which has the lowest California rating of the three major ratings agencies at AA-minus, has the state on positive outlook, which could mean a ratings upgrade.
The state’s GOs carry ratings of Aa2 and AA from Moody’s Investors Service and Fitch Ratings. Both assign stable outlooks.
The California State Treasurer’s office filed a disclosure notice in March on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website saying the ACFR for fiscal year ended June 30, 2021 would “be delayed well beyond March 31, 2022,” and when it had been completed it would be posted on the state controller’s website and filed by the state treasurer on the EMMA website.
The fiscal 2020 ACFR was delivered in February 2022, more than 19 months after the fiscal year closed.
The median audit time for state governments in the period from 2009 to 2020 raged from 176 to 184 days, according to a report by Merritt Research and the University of Chicago Government Finance Research Center.
State Controller Betty Yee, who is in her eighth, and because of term limits, final year in the elected office, has pointed to the cumulative effect of three previous fiscal years of late ACFRs for the delay, according to the disclosure document.
The multiple years of increasing delays are due “to a large number of state departments transitioning from several separate legacy account systems to a new statewide accounting, budget, cash management and procurement information technology system, contributing to delays in state departments providing information to the state controller necessary for the preparation of the ACFR for such fiscal years, the 2021 ACFR is also expected to be delayed,” the disclosure says.
“The State Controller’s office is continuing its internal efforts, as well as its work with other state departments and the State Auditor’s office, to make the release of the state’s basic financial statements more timely,” the disclosure said.
Bond counsel on next week’s deal is Orrick, Herrington & Sutcliffe. Orrick and Nixon Peabody are co-disclosure counsel. Orrick and Stradling Yocca Carlson & Rauth are co-disclosure counsel on Appendix A. Underwriters counsel is Hawkins Delafield & Wood LLP. Public Resources Advisory Group is municipal advisor.
Schaefer said he expects the state will see the usual interest from retail investors in the state seeking shelter through tax exemption, even though income tax collections were down the past few months.
“We don’t have any concerns there would be a reason for retail consumers to not participate,” Schaefer said. “That is why we advertise and market to them, and have a separate sales date for them, but the proof in the pudding will be in the success of the offering.”
Though California, and munis in general, have received broader participation from international investors as taxables were used to replace advance refundings, Schaefer thinks international market forces could dampen that.
“California for a number of years has been on the tip of the spear selling taxable debt outside of the U.S.,” Schaefer said. “I don’t see any indication at this point that is being reversed. However, I would be quick to point out our economy and the U.S., are not the only ones battling inflation.”
He mentioned Germany and the United Kingdom, specifically.
“Inflation can muddy the waters when selling fixed rate securities,” Schaefer said.
“There is no reason to be pessimistic, because of our long-time penetration of international markets. But it’s clear to me international markets are facing turbulent times,” he said.
“We will just take it one offering at a time,” Schaefer said.