Thursday, June 18, 2009

Spreads on Calif GOs reflect budget anxieties

Spreads on Calif GOs reflect budget anxieties
By Jim Christie
SAN FRANCISCO (Reuters) - Spreads on California's general obligation bonds have widened as its budget crisis worsened and may widen further with Governor Arnold Schwarzenegger and lawmakers debating how to plug a $24.3 billion shortfall, analysts said on Wednesday.
The rising spreads reflect the effect of a steady stream of negative news on the municipal debt market's view on how the government of the most populous U.S. state is facing up to the challenge of balance its books amid its worst slide in revenues since the Great Depression.
In recent weeks estimates of the state budget's gap have been revised up, the state controller has warned the state is nearly out of cash, and Democratic and Republican lawmakers clashed over spending cuts and revenue increases.
And this week, Standard & Poor's placed $67.1 billion of California's debt on alert for a possible credit ratings cut, which could complicate the state's bond plans and increase its borrowing costs.
California, already the lowest rated U.S. state, plans to sell short-term debt -- $7 billion to $9 billion in revenue anticipation notes, according to the state treasurer's office -- once a budget is signed for the fiscal year beginning on July 1.
Rising spreads underscore anxiety, said analyst Domenic Vonella at Thomson Reuters MMD, a municipal market data service: "Folks are in a wait-and-see mode. There is little market players can do right now. They're just hoping for the best."
"Every time bad news comes out, the front end of the curve gets hit hardest," Vonella added, noting California's fiscal crisis and its need for short-term debt has cast a gloom over sentiment about the near-term prospects for stability taking hold on state finances.
"There is a fear of excess short-term supply, that revenue anticipation notes would create pressure in that area of the curve and then there are short-term risk factors, which require more return in that sector of the curve," Vonella said.
Since May 1, the yield on the five-year California GO scale is up 92 basis points, compared with a rise of 41 basis points for the five-year benchmark MMD triple-A scale and a 16 basis point increase in the yield on the five-year GOs of New York state, which also has some of the nation's worst financial problems.
California's yield rise reflects the risk premium for the state's debt in light of its budget woes, Vonella said.
California's budget problems are affecting the muni market in other ways as well, said Dennis Ciocca, a senior managing director at public finance banker Sutter Securities Inc.
Concern that the state may resort to borrowing money from local governments is weighing on local issuers' budget and financial plans, including their debt plans, Ciocca said.
"It's a pretty nasty situation," Ciocca said "It's why issuance is so small in California right now ... There is so much uncertainty as to what the financial situation is going to be at the local level."
Ciocca is advising local issuer clients to stay on the sidelines: "If you don't absolutely need the money, you shouldn't be going to the market right now."
Meanwhile, the state government faces the prospect of steep costs to sell short-term debt once it has a budget. Continued...
Source: Reuters

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