Revenue Anticipation Notes

Wall Street is looking forward to learning California's short-term borrowing plans -- once Sacramento produces a fiscal 2010 budget more or less in balance. The bond market has been expecting that the state would seek short-term financing to bridge the gap between current cash needs and future tax revenue. Normally, this kind of borrowing -- via so-called revenue anticipation notes, or RANs -- is no big deal.

If the budget deal reached in Sacramento on Monday is more than smoke and mirrors, California should soon be able to stop issuing IOUs and turn back to Wall Street for short-term financing. But before that can happen, state Treasurer Bill Lockyer and Controller John Chiang will have to determine how much cash will be coming in the door this fiscal year, and how much less will be going out because of budget cuts.

California Treasurer Bill Lockyer will have to borrow $10.5 billion next month. That's no small chunk of change. But the way it looks now, many investors will be lining up to hand him their money. Despite the state's global reputation for fiscal mismanagement, and the lowest credit rating in the Union, California is in the right place at the right time to put out its hat. The confluence of events can be summarized like so: Cash-needy state meets needy cash. For the last five months, investors have grown increasingly confident that the U.S. economy no longer faces collapse.

California's planned sale of as much as $10.5 billion in short-term notes is scheduled for the week of Sept. 21, Treasurer Bill Lockyer's office said Tuesday. The debt, known as revenue anticipation notes, or RANs, would bridge the gap in timing between near-term state spending and tax revenue expected later in the fiscal year. The money raised also would repay a $1.5-billion loan that JPMorgan Chase & Co. made to the state last week. That loan will allow Lockyer to begin redeeming IOUs issued by Controller John Chiang since early July, when the state first began to run short of cash.

Two major credit-rating firms gave California high ratings Monday on $8.8 billion of short-term notes that Treasurer Bill Lockyer plans to sell next week. Moody's Investors Service graded the debt MIG 1, the firm's highest rating. Standard & Poor's gave the notes a rating of SP-1, just below its top grade of SP-1-plus. The ratings could help draw orders for the notes from money market mutual funds and other institutional investors that may buy only high-quality, short-term debt.

Investors' desperation for decent income played into California's hands this week as the state wrapped up its mammoth sale of $8.8 billion in short-term debt. The offering drew bids totaling $9.23 billion as institutional investors fought Wednesday to get the relatively little that was left over after individual investors snapped up most of the securities. Institutions such as mutual funds bid for $2.59 billion of the notes but will get only $2.16 billion because the state is filling all the $6.64 billion in prior orders from individuals.

California this week plans to sell $6 billion of so-called revenue anticipation notes, short-term IOUs used to help the state meet financial obligations while awaiting future tax payments. Individual investors were given Monday and today to place orders for up to $3 billion of the notes. Banc of America Securities, the lead underwriter for the deal, said the $3 billion in securities would pay an annualized tax-free yield of 1.6% to 1.65%.