Major banks snubbed California last month when the state asked them to continue cashing its IOUs.
Now, one of the banks is riding in to help the state end the IOU program a month earlier than expected.
Treasurer Bill Lockyer says JPMorgan Chase & Co. has agreed to lend California $1.5 billion as part of Controller John Chiang's plan to begin redeeming IOUs on Sept. 4.
The IOUs, which the cash-strapped state began issuing July 2 to pay many of its business vendors and other creditors, were supposed to mature Oct. 2. But Chiang said last week that the budget passed by the Legislature produced enough savings to allow for earlier redemption of the scrip -- provided the state could get a $1.5-billion short-term loan by Aug. 28.
When Lockyer began talking to big Wall Street banks in recent weeks about a loan, JPMorgan was the first to come back with a proposal worth considering, said Tom Dresslar, Lockyer's spokesman.
Just what JPMorgan will earn on the loan hasn't been determined, Dresslar said. The terms are still being worked out, he said. Lockyer will have to be able to make the case that the private placement of the debt with JPMorgan is as good as or better than any deal the state could get with other banks.
The risk to JPMorgan is virtually nil: The loan will be repaid by late September, when the state plans to sell $10.5 billion of so-called revenue anticipation notes, or RANs -- securities that will mature next spring. Individual investors are expected to flock to the RAN offering as a place to stash cash, because the notes should offer much more lucrative returns than money market funds and other short-term accounts paying next to nothing.
Some muni bond analysts expect the annualized interest yield on the RANs to be between 2% and 3%. For California residents, that interest would be exempt from state and federal income tax.
Last month, JPMorgan, Bank of America Corp., Wells Fargo & Co. and other banking titans were unwilling to cash the state's IOUs beyond the first week that Chiang began issuing them, despite pleas from Lockyer. The $2 billion in outstanding IOUs are earning a tax-free annualized yield of 3.75%, which would have accrued to the banks if they had continued to cash them for customers and then hold them to maturity.
Beyond the interest it will earn on the $1.5-billion loan, JPMorgan's proactive move on the deal is a way to get back into the good graces of a state that always has plenty of fee-generating financing needs.
In other good news for the state, Standard & Poor's said Tuesday that California's budget-balancing plan was solid enough to keep its low credit rating from getting lower, at least in the short term.
The rating company affirmed its "A" grade on the state's $67 billion in outstanding general obligation bonds and removed the debt from its "negative credit watch" list. That means "the potential for a downgrade is now less imminent," said S&P analyst Gabriel Petek.
S&P is the first of the three major rating firms -- the others are Moody's Investors Service and Fitch Ratings -- to weigh in on the budget deal cobbled together by the Legislature and Gov. Arnold Schwarzenegger last month.