BOND AID ECONOMIC RECOVERY CERTIFICATES SHOULD HELP PUT CALIFORNIA'S FINANCES BACK IN BALANCE.Byline: Jabulani Leffall Staff Writer Buy a bit of California; save the state from calamity. Gov. Arnold Schwarzenegger's plan to restore the state's financial footing was formally launched this month with the public offering of $7 billion in bonds, spawning the largest one-day municipal bond sale in history. The remainder of the Economic Recovery Bonds will be issued by the middle of next month. Institutional investors typically grab the lion's share of public bonds, but does it make sense for casual investors to help float a $15 billion loan to a nearly bankrupt state whose credit has been downgraded by Wall Street to near junk bond junk bond, a bond that involves greater than usual risk as an investment and pays a relatively high rate of interest, typically issued by a company lacking an established earnings history or having a questionable credit history. status? It may not be as crazy as it sounds. These bonds are paid off from allocated sales tax sales tax, levy on the sale of goods or services, generally calculated as a percentage of the selling price, and sometimes called a purchase tax. It is usually collected in the form of an extra charge by the retailer, who remits the tax to the government. revenues and so enjoy a high rating from Wall Street, and the interest on them is tax-exempt. The Economic Recovery Bonds approved by voters in March could be a good investment for the right person who can afford the $5,000 minimum. ``The state is going to structure these bonds so that they reach a pretty wide array of investors,'' said David Blair David Blair is the name of:
http://www.nuveen.com Nuveen's Corporate Website . ``Sure you'll have institutional buyers, but it'll also be for people who are looking for Looking for In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. long-term growth.'' The Economic Recovery Bond, which had its first public offering on May 5 of $7.9 billion, was so popular with investors that underwriters in the investment banking arena received double the available number. The bonds, sold at a true interest cost of 4.025 percent, also attracted record retail orders totaling $2.3 billion. Institutional buyers gobbled up just under $6 billion. ``That's pretty impressive,'' said David Blair, vice president and senior analyst for Nuveen Investments. ``Clearly, I think the high quality of the bond and its strong security structure contributed to investors coming out in droves the way they did.'' Returns on bonds, which are typically a secure and predictable investment, can be used as savings, for retirement funds and even for financing a college education upon maturity. But bonds are a particularly good move for tax savings. Yields on the recovery bonds are projected to be as high as 6 percent and interest income is exempt from both state and federal tax. ``Generally, the higher the tax bracket Tax Bracket The rate at which an individual is taxed due to a particular income level. Notes: Each income class is taxed at a different level. Generally, the more you make the more you are taxed. the better the benefit,'' said Amy Resnick, editor-in-chief of Bond Buyer, a publication covering public finance. While issuing the caveat that anyone looking to buy into the state should consult a financial adviser, Resnick added that the Economic Recovery Bond will be for the prudent buy-and-hold investor. Certainly for its part, the state is hoping that individual investors will continue to come out en masse en masse adv. In one group or body; all together: The protesters marched en masse to the capitol. [French : en, in + masse, mass. . The governor and state Controller Steve Westly Steven Paul Westly (born August 27, 1957, in Arcadia, California) is an American businessman and politician. He was the State Controller of California from 2003 to 2007 and was one of the top two candidates in the Democratic primary for Governor of California in the 2006 election. jointly campaigned for passage of the bond, and that burst of high-profile pitch is what experts say attracted wider attention. That isn't by accident. Treasurer Phil Angelides Philip Nicholas "Phil" Angelides (IPA: æn.dʒε.'lid.ɪs) (born June 11, 1953 in Sacramento, California), is a California politician who was California State Treasurer and the unsuccessful Democratic nominee for Governor of California in the 2006 elections. , the leading opponent of the recovery plan, has indicated that the state is targeting the retail investor Retail Investor Individual investors who buy and sell securities for their personal account, and not for another company or organization. Notes: Retail investors buy in much smaller quantities than larger institutional investors. . Usually the issuers of municipal bonds such as these look to sell at least one-third of the issue on the retail market. ``In a very uncertain world, (the bond issue) remains a safe haven and a good, secure investment,'' Angelides said in the wake of the sale. That these bonds will be repaid by sales tax is music to analysts' ears because there is little likelihood of default. The three top credit rating agencies Credit Rating Agencies Firms that compile information on and issue public credit ratings for a large number of companies. all differentiated this bond from all other general obligations that the state owes. Standard & Poor's assigned a preliminary credit rating of AA minus - a far cry from the BBB BBB A medium grade assigned to a debt obligation by a rating agency to indicate an adequate ability to pay interest and repay principal. However, adverse developments are more likely to impair this ability than would be the case for bonds rated A and above. minus rating for the state's general obligation bonds. Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. upgraded the bond to A plus and Moody's to AA minus status. The higher the rating on the bonds, the lower the rates and the easier it is to attract investors. James Peterson of the Schwab Center for Investment Research expects a continued demand for the bonds but cautions that as interest rates rise the value of these bonds could be affected. ``Most bond yields have already inched up in recent weeks in anticipation of Fed hiking its rate,'' Peterson said. ``So if bond yields continue to increase, the value of these California bonds will go down, as will prices of all existing bonds.'' Up until Proposition 57 - the voter-approved ballot measure that made this debt issuance possible - passed in March the state had been keeping the deficit at bay by issuing what is called short-term bridge financing Bridge Financing A method of financing, used by companies before their IPO, to obtain necessary cash for the maintenance of operations. Notes: These funds are usually supplied by the investment bank underwriting the new issue. with maturities of less than a year. The state has issued $11 billion in warrants, which are debt obligations similar to bonds, and $3 billion in revenue anticipation notes Revenue Anticipation Note (RAN) A short-term municipal debt issue that will be repaid with anticipated revenues, such as sales taxes, from the project. , which are paid back when the state rakes in more money. These are due next month. The state will use the proceeds of the new bond sale to remove existing debt from its balance sheet by retiring some of the short-term financing. In plain English it's new debt on top of old debt. ``I think the governor realizes that borrowing in significant amounts going forward is not a viable option,'' Blair said. ``They may have to find other ways to shore up revenue and they have to hope to some extent that the economy helps them as well.'' Jabulani Leffall, (818) 713-3699 jabulani.leffall(at)dailynews.com BIRTH OF THE BOND The jury is still out on whether the bond issue is just a Band-Aid fix for an ongoing fiscal crisis or a financial bridge to a more stable future for the state. California will borrow up to $15 billion to create a stopgap that will prevent a fiscal disaster for the state. Here's how the life of the bond unfolds. March 2: Voters approve Propositions 57 and 58 April 10: Secretary of state certifies election results April 20: Economic Recovery Bond Finance Committee approves bond April 26: State treasurer launches marketing of bond May 3-4: First issue of $7 billion in secured debt Monday-June 15: Pricing and issuance of remainder of bond CAPTION(S): drawing, box Drawing: (color) BOND AID Warren Huskey/Staff Artist Box: BIRTH OF THE BOND (see text) |
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