A bridge loan too far? California aims to borrow $5B to protect against U.S. default

California plans to borrow $5 billion in a bridge loan next week to have cash available ahead of any disruption to the credit markets if U.S. lawmakers fail to raise the federal debt ceiling, Treasurer Bill Lockyer said.
The state will seek competitive bids July 26 from investment banks, commercial banks, credit unions and investment funds, Lockyer’s spokesman, Tom Dresslar, said yesterday. Proceeds will help pay bills until the state can sell an estimated $5 billion of so-called revenue-anticipation notes, or RANs, scheduled for late August.
Without those short-term securities, the state may run out of cash as it did in 2009, when it issued $2.6 billion of IOUs. President Barack Obama and Congress are negotiating to raise the U.S. debt ceiling and avert a default before an Aug. 2 deadline. Standard & Poor’s and Moody’s Investors Service have said they may lower the U.S. government’s AAA credit rating if the talks falter.
“The notes will be privately placed, rather than sold in the market,” Dresslar said in a statement. “If the president and Congress reach an agreement to raise the debt ceiling before we award the bids, we could pull the plug on the sale.”
California used a $6.7 billion bridge loan from JPMorgan Chase & Co. and five other banks in October, when a record 100- day budget impasse prevented Lockyer from issuing RANs. The notes are commonly used for cash flow before the bulk of taxes is collected later in the year.
Paying Off Loan
“The state still will go to the market at some point to sell about $5 billion of regular RANs,” Dresslar said. “The proceeds of that sale would be used to pay off the bridge loan, if that transaction is completed.”
Governor Jerry Brown is considering whether to sign a bill that would let the state borrow almost $2 billion of cash held by the University of California, the California State University system and California community colleges.
The money could be used to pay bills and would help guarantee repayment of the notes, lowering interest costs. The state would pay about 1.5 percent interest on the college loan.
California paid 1.4 percent on the October loan, which was repaid when Lockyer sold $10 billion of RANs at the end of November. The sale included $2.25 billion of notes that came due in May with a yield of 1.5 percent and $7.75 billion that matured in June at 1.75 percent.
California Yield
The May notes yielded 98 basis points, or 0.98 percentage point, more than top-rated one-year debt at the time and the June notes yielded 123 basis points more, Municipal Market Advisors data show. California sold $8.8 billion of such notes in September 2009 and $5 billion the previous year.
Yields on RANs have plunged along with Treasuries. One- year, tax-exempt note yields fell to 0.28 percent this week, according to a Bond Buyer index, down from 0.54 percent a year earlier, and 3.69 percent in 2007, before the recession.
California, which has the lowest credit rating of any state from Standard & Poor’s and is typically the largest U.S. issuer of municipal debt, hasn’t sold any general-obligation bonds in 2011 as legislators debated solutions for a $26 billion deficit.
Ten-year general obligation bonds from California issuers yielded 4.01 percent on average, or about 1.10 percentage points more than average top-rated debt of that maturity, according to Bloomberg Fair Value indexes yesterday. The yield difference was the smallest since April 28.
–Bloomberg News–

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