Economic headwinds and market forces did not affect California's bond pricing power as it entered the market this week with a $625 million lease revenue bond refunding.
Goldman, Sachs & Co and Academy Securities were joint senior managers on the deal. Backstrom McCarley Berry & Co. was co-senior manager and 15 other banks rounded out the syndicate.
"They have been well received considering what the market has been doing," Dora Lee, director of research for Belle Haven Investments, said Tuesday as the state presented the deal to retail buyers. It held institutional pricing Wednesday on the deal.
Morgan Stanley issued a research report Tuesday forecasting "more fund outflows as we wrap up a difficult quarter end."
The Investment Company Institute reported Wednesday that investors pulled $845 million from municipal bond mutual funds in the week ending Sept. 20 after $1.566 billion of outflows the previous week.
Reports of expected outflows in the fourth quarter didn't dampen enthusiasm for California's bonds.
Goldman Sachs
The refunding netted California $54.1 million of savings on a present value basis,
Stradling Yocca Carlson & Rauth was bond counsel. Ballard Spahr was underwriter's counsel. Squire Patton Boggs was disclosure counsel, and Orrick Herrington & Sutcliffe and Stradling Yocca Carlson & Rauth were co-disclosure counsel on Appendix A.
The proceeds will be used to refund the State Public Works Board's outstanding Series F, 2013 Series G and 2013 Series I bonds for debt service savings. Debt service on the series 2023C bonds are supported by rental-lease payments from a county jail, juvenile rehabilitation facility, state prison buildings and a San Diego courthouse.
The lease revenue bonds received an A-plus rating with a positive outlook from S&P Global Ratings, AA-minus from Fitch Ratings with a stable outlook, and an Aa3 rating with a negative outlook from Moody's Investors Service.
All three rating agencies hold the lease revenue debt one notch below California general obligation bonds.
Lee said Tuesday Belle Haven expects the bonds to price through the MMD as they have before, sustaining the state's reputation of being well received by investors.
"With the mutual fund versus the Money Market Account dynamic, we see the front end will be well subscribed and then there will be concessions on the longer maturities, because the natural buyers are those two areas of the maturity band," she said.
California's revenue bonds were expected to trade competitively to the MMD scale based off GO sales. But revenue bonds sometimes trade better than GOs because investors see a reliable revenue stream as a better bet than whether lawmakers will raise taxes to support GOs.
"There has always been a lot of demand for California paper, given the tax rate and strength of California credit," Lee said. It's still considered a strong credit even though it has forecasted budget gaps, and heading into a probable recession, she said.
The state closed a $31.5 billion deficit when it approved a $310 billion budget in July, and preserved $32 billion in reserve funds. This year's budget process was much different than the one a year before when lawmakers were contemplating how to spend a $100 billion surplus.
The deficit was a result of downturn in the stock market as a significant source of the state's revenues come from income taxes and high earners. To add to the state's uncertainty, tax filers
The tax filings delay hasn't appeared to impact retail demand for the state's bonds. Consistent demand for the state's bonds has often been attributed to the high number of high net state residents seeking the tax break that investing in municipal debt offers.
"Through the end of the year, we will see tax loss harvesting," Lee said. "That always comes in November and December. For some reason, people leave that to the last minute."
Nor have investors dinged the state for its late
Nearly 15 months after the close of fiscal 2022, the ACFR has yet to be published.
The State Public Works Board bond offering documents included California's ACFR for fiscal 2021, which acknowledged that it marks the fourth year the state has gone beyond the "regulatory deadline of nine months after the fiscal year-end" to produce the document. The state has attributed the delays to problems converting over to FI$CAL, a new electronic financial reporting system.
"The State Controller's Office remains dedicated to supporting timely and accurate financial reporting, and is confident that the efforts currently underway which include moving the SCO Book of Record to FI$CAL will lead to measurable advancements in improving timely financial reporting," said the letter attached to the ACFR from State Controller Malia Cohen, who was elected to the office in 2022.
The state on Sept. 6 also priced $2.6 billion of tax-exempt general obligation bonds that included a $1 billion refunding for savings on Sept. 6.
The new debt on that deal funded capital projects that included school construction, improvements to clean water access and high-speed rail. Citigroup and RBC Capital Markets were lead managers on that deal.
It also has $1.1 billion in various-purpose federally taxable GOs selling competitively on Oct. 4, and two additional sales planned for October and November with unknown amounts.
The state's GOs are rated Aa2 by Moody's, AA-minus by S&P, and AA by Fitch. The state has mixed outlooks: negative from Moody's, stable from Fitch and positive from S&P Global Ratings.
Moody's revised its outlook to negative and affirmed the Aa2 rating in May saying the revised outlook "reflected a weakened and uncertain revenue environment that raised the possibility of extended pressure on the state's budget."
The "state's enacted fiscal 2024 budget scaled back or delayed certain non-recurring spending in an effort to retain budget reserves. However, a more complete and accurate picture of the state's revenue collections will likely not be available until October given an allowable shift in the income tax filing deadline. The delayed receipt of revenue leaves the state with less certainty around fiscal 2024 budgeted revenues and a narrowed window in which to respond to revenue collections that fall short of present assumptions."
Trading on California's GOs in the secondary market stayed pretty steady throughout the year continuing to price well against the MMD's AAA scale. The one-years were trading 5 basis points below the MMD Tuesday, 10 years were trading 10 basis points above and 30 years were trading 13 basis points above the MMD. Trading on the state's bonds were pretty similar at the beginning of the year, accept for the one years. On Jan. 1, the benchmark 10-year California GOs were trading 8 basis points above the MMD, while on Jan. 3, the 10 years were trading 6 basis points above the MMD.
