Retail investors jump on $9.23 billion upsized California RANs sale, pushing yields down

By Sheri Kasprzak

New York, Sept. 23 - All eyes were on the State of California's enormous revenue anticipation notes sold Wednesday, especially when yields were on the low side for such a risky issuer.

Retail investors were part of the driving factor behind the low yields on the notes, said Tom Kozlik, municipal credit analyst at Janney Montgomery Scott LLC.

"Retail was the driver, especially with the June maturity," Kozlik said in an interview Wednesday afternoon.

"We weren't part of the deal, but it's my understanding that there wasn't much institutional [interest] because of the rating situation. If I put myself in a retail investor's shoes, it's a nicer yield than I'm going to get in a money market fund."

The split rating on the notes (Moody's Investors Service rates the notes MIG 1, while Standard & Poor's rates the notes SP-1 and Fitch Ratings rates them F2), might have turned institutional investors off of the deal, Kozlik said.

"It's hard to say at what point more retail or more institutional would have been interested," Kozlik added.

"This is a credit that's been downgraded over the past six or nine months. There was a little more risk than what institutional folks wanted to take. Retail wanted a little extra yield."

That state itself considers the offering a victory.

"Investors clearly know a good deal when they see one, and California taxpayers will benefit as a result," state treasurer Bill Lockyer said in a statement.

"We have a lot of work to do to fix our structural budget defects. But in the short term, this successful sale will help restore the state's fiscal equilibrium."

The low yields, according to a statement from the treasurer's office, will save taxpayers $15.5 million compared to higher-yielding notes.

RANs fetch 1.25%, 1.5% yields

The state issued $9.23 billion in debt Wednesday, upsized from $8.8 billion.

"I think the fact that they were able to upsize by so much really speaks to the popularity of these [notes]," said one sellside source reached during the afternoon.

The notes were sold in two tranches: a $3.29 billion tranche of series 2009A-1 notes and a $5.94 billion tranche of series 2009A-2 notes.

The 2009A-1 notes are due May 25, 2010 and have a 3% coupon, priced at 101.137 to yield 1.25%. The 2009A-2 notes are due June 23, 2010 and have a 3% coupon, priced at 101.088 to yield 1.5%.

"The yields are kind of surprising, given the risk factor, but clearly retail investors felt it was attractive compared to other options like equities," the sellsider said.

The yields came in at around price talk, said Tom Dresslar, spokesman for the treasurer's office. Dresslar said investors had been quoted yields from 1.25% to 1.5% for the May maturity and from 1.5% to 1.75% for the June maturity.

J.P. Morgan Securities Inc. was the senior manager.

Proceeds from the sale will fund cash flow management for fiscal year 2009-2010.

Municipals end day firmer

Despite light trading action Wednesday, a trader said the tone of the market remained fairly firm.

"There's really not a good deal going on," said the trader, "but there's a firmer tone out there."

The trader noted that most of the yield curve was holding steady.

Among Wednesday's trading activity, the North Carolina Eastern Municipal Power's recently priced series 2009C Build America Bonds were moving. The 4.68% 2015 bonds were seen at 4.247%.

A trader said he saw some interest in the City of Waterbury's recently priced taxable pension bonds. The 7.089% 2038s were trading at 6.531%.

Osceola County sells $131.26 million

Elsewhere in primary action, Osceola County in Florida sold $131.26 million in series 2009 capital improvement revenue bonds on Wednesday, said a term sheet.

The sale included $38.645 million in series 2009A tax-exempt bonds, $85.845 million in series 2009B Build America Bonds and $6.77 million series 2009C Build America Bonds.

The series 2009A bonds are due 2010 to 2023 with coupons from 2% to 5%. The 2009B bonds are due 2029 and 2039. The 2029 bonds have a 6.721% coupon, priced at par, and the 2039 bonds have a 6.946% coupon, also priced at par. The 2009C bonds are due 2030 with a 6.796% coupon, priced at par.

The bonds (A2/A+/A+) were sold on a negotiated basis with Citigroup Global Markets Inc. as the senior manager.

Proceeds will be used to fund a variety of capital improvements throughout the county.

The county seat is Kissimmee, Fla.

Jacksonville brings $108.44 million

Also on Wednesday, the City of Jacksonville, Fla., priced $108.435 million in series 2009B-1 special revenue bonds, said a pricing sheet.

The bonds were sold through senior managers Goldman, Sachs & Co.; Merrill Lynch & Co.; and RBC Capital Markets Corp.

The bonds are due 2011 to 2025 with coupons from 2% to 5%.

Proceeds will be used to fund Better Jacksonville projects, including improvements to parks, infrastructure, economic development and other public facilities.

Cascade Water Alliance prices

The Cascade Water Alliance in Washington State priced Wednesday $80.065 million in series 2009 water system revenue bonds, said a pricing sheet.

The bonds (Aa3/AA+/) were sold through lead manager Barclays Capital Inc.

The sale included $4.935 million in series 2009A tax-exempt bonds and $75.13 million in series 2009B Build America Bonds.

The 2009A bonds are due in 2015 and 2016 with 5% coupons for both maturities. The 2009B bonds are due 2010 to 2026 and in 2029 and 2034. The serials have coupons from 1.03% to 5.618%, all priced at par. The 2029 bonds have a 5.668% coupon, priced at par, and the 2034 bonds have a 5.907% coupon, also priced at par.

Proceeds will be used to implement the alliance's watershed management plan.

The alliance is based in Bellevue, Wash.

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