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California plans $4-billion tax-free bond offering

Treasurer Bill Lockyer wants to raise cash for infrastructure projects that have been delayed by the state's budget debacle.

March 14, 2009|Tom Petruno

California plans to jump back into the municipal bond market this month with its first sale of long-term securities since June.

Treasurer Bill Lockyer said Friday that he hoped to sell $4 billion in tax-free general-obligation bonds the week of March 23 to raise cash for infrastructure projects that have been delayed by the state's budget debacle.

"The market is ready for a California comeback," the treasurer said in a statement.

But some muni-bond market analysts say the state could have trouble luring enough investors to complete the deal, short of paying extraordinarily high interest rates.

"This will be a real test for the market," said Matt Fabian, senior analyst at research firm Municipal Market Advisors in Westport, Conn.

Yields on long-term muni, government and corporate bonds have been moving higher over the last month as investors have gotten pickier.

Although demand from individual investors has been strong for munis, bigger investors -- particularly insurance companies -- have been selling bonds to raise cash, Fabian said.

As he has in recent years, Lockyer will be making a major sales pitch to individual investors in print and radio ads. The state, via brokerages, will take individual-investor orders for the securities March 23 and 24. Institutional investors then will bid March 25, which is when final yields will be set.

Lockyer also is planning to run ads in the New York area in an attempt to attract high-income investors there.

Based on current yields on California's previously issued general-obligation bonds, the upcoming deal could be very attractive for high-tax-bracket, income-hungry investors. For Californians, interest on the state's bonds is exempt from federal and state income tax.

The bonds will be sold in maturities of one year to 30 years. The five-year issue could pay a tax-free annualized yield of about 3.50%, said Stephen Kelleher, head of muni bonds at brokerage Wedbush Morgan Securities. The 10-year bond yield could be in the range of 4.50% to 4.75%, and the 20-year bond yield could be about 5.85%, Kelleher said.

Because of its continuing budget woes, California has the lowest credit rating among the states. But the state Constitution mandates principal and interest payments on general-obligation debt, so Sacramento has no leeway on debt repayment.

More information on the bond sale is available at Lockyer's website, www.buycaliforniabonds.com.

Lockyer said he was also considering a sale of taxable general obligation bonds in April under the federal government's new Build America Bonds program.

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tom.petruno@latimes.com

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