California plans to go to market next week with a $2.5 billion general obligation bond deal amid a heavy new issue calendar that brought
Leading a 27-bank syndicate, senior managers J.P. Morgan Securities and Loop Capital Markets on Wednesday will price the debt in two tranches: $1.2 billion of various purpose GOs to support capital projects and $1.3 billion of various purpose GO refunding bonds. A retail order period planned for Tuesday will be served by an 18-bank selling group.
Public Resources Advisory Group is the municipal advisor and Orrick Herrington & Sutcliffe is bond counsel.
CUSIP requests for municipal bond identifiers increased by 35.1% in February over January, and requests were up 17.1% year-over-year, according to the latest trend report from CUSIP Global Services.
"It feels to me like all the bankers are rushing to get deals out, because of the potential tax change ramifications" if the
Though the deal is one of the largest offerings this year in a market that has been supply heavy, John Sheldon, the state's
Over the past several years direct individual retail has ranged between $200 million and $500 million per California GO transaction, Sheldon said, adding that when combined with professional retail orders, retail overall is very significant.
"A lot could change in the next week, but I am fairly confident we will see a strong amount of demand from our investor base," Sheldon said. "Last week, there was a competitive deal over $2 billion that did quite well."
The Dormitory Authority of the State of New York sold $2.06 billion
As for the market's ability to absorb a deal of this size, he notes that the size of the refunding is smaller than the $1.7 billion in refunding bonds the state sold in August in a $2.58 billion GO deal that included $872 million in new money bonds.
"The underwriters have been saying there are a lot of eyes on the transaction," Sheldon said.
The deal is the state government's first large issuance in its fall slate and the first negotiated deal.
On Tuesday, the state
Last week it sold $889 million of taxable various purpose GOs in a competitive sale, with three series won by Wells Fargo Securities and JPMorgan.
Bel Air hasn't changed its investing strategy, even though as the Treasury market has been rallying, the muni market has given up 20 basis points month-over-month, Brothers said.
"It's not making us want to buy credits we didn't before," Brothers said.
The strategy Bel Air has maintained even amid the market changes is one of buying revenue bonds instead of the state's GOs, because of concerns over the state's fiscal condition.
The threat to tax exemption hasn't resulted in the state trying to get more debt out the door, Sheldon said.
"We have a pretty well-oiled process of borrowing for new money purposes when projects in the pipeline need to get off the ground," Sheldon said. The different departments in the state with access to GOs put in a request for financing and then the Department of Finance goes over the list and gives the state treasurer's office the figures to sell, he said.
"The debate will continue to brew for a while. I can't say if it will affect our approach in the fall at this point," Sheldon said of the risk to the tax exemption.
The treasurer's office takes the opportunity to sell refunding bonds if there is an opportunity for savings, he said.
"Our sales are still consistent with what we have sold historically," Sheldon said.
For Brothers, the potential hit to the state budget from Los Angeles County taxpayers being able to defer income taxes until Oct. 15 after
Los Angeles County represented 21% of California individual income tax liability, 28% of corporate income tax liability and 32% of the pass-through entity tax liability in 2022, according to the preliminary official statement, which noted in its economic and budget risk section "the increasing incidence of tax deadline delays."
After severe winter storms, residents in nearly every county were allowed to
Though the 2023 delay resulted in a $38 billion
"It's far less than what the state had to deal with last time this occurred," Sheldon said.
Neither the income tax delay nor uncertainty around Medi-Cal, California's Medicaid program, has impacted ratings.
The Department of Finance requested a loan of $3.4 billion to cover an anticipated shortfall in the program, according to the investor presentation.
State finance officials expect that fiscal 2026 will mark the 11th consecutive budget year without requiring external cash borrowing through revenue anticipation notes, according to the presentation.
The rating agencies maintained their ratings ahead of the deal: Aa2 from Moody's Ratings, AA-minus from S&P Global Ratings and AA from Fitch Ratings. All
The AA-minus rating reflects an expectation " that California will continue to manage its budget through multifaceted actions as they encounter various physical events as well as economic and federal policy uncertainties," S&P analysts wrote in an updated credit outlook in early March.
"The governor's proposed fiscal 2026 budget continues a trend of improving structural balance with an S&P Global Ratings calculated deficit of $3.8 billion or just 1.7% of expenditures," S&P wrote.
S&P analysts did acknowledge that the tax collection delay due to the Southern California wildfires injects some uncertainty into the state budget.
"Strong fiscal management, institutionalized across administrations and demonstrated through the buildup of the budgetary stabilization account (BSA) and elimination of past budgetary borrowing, allows the state to better withstand economic and revenue cyclicality," Fitch analysts wrote in a March 25 report. "Responses to the most recent revenue volatility suggest a willingness from policy makers to draw on the increased fiscal capacity and accept somewhat lower levels of financial resilience to support priority programmatic funding."
Fitch did add the caveat that passage of the 2026 enacted budget will add clarity to "the state's desired balance between maintaining future gap-closing capacity and addressing policy goals."
