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Written by admin on November 4th, 2008

$5 Billion In Short-Term Debt Sales In California

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Thursday, October 16 – California’s sale of short-term notes increased to $5 billion today as investor orders showered the markets. This action put an end to the cash flow emergency that may have sent California to the Federal government for a loan.

California State Treasurer Bill Lockyer stated that $2 billion in orders for IOUs were issued by different institutional investors, as well as an additional $3.92 billion from individual investors.

The request for short-term debt notes was initially $4 billion but increased demand required the additional billion dollars. Individual investors would be the first to receive benefits from the relief plan with institutions receiving the money afterward.

Notes were made available at an annual tax-free interest rate of 3.75% for those issued for seven months and 4.25% for those issued for eight months. Initial estimates on yields made on Tuesday by the state were not far off from the revised numbers. Some variation was made based upon anticipated investor responses. The big selling point for these notes is the tax-exempt interest.

The state of California has a history of offering short-term debt loans on an annual basis to provide coverage for seasonal budgetary shortfalls. Yet, ballooning credit crisis caused many investors to totally abandon the municipal debt market. These actions increased fears that the state government would not be able to maintain its operational budget. Apprehensions were supported by an October 3 message by Governor Schwarzenegger in which he suggested that the state might need a federal loan.

With all of this said, the current state of affairs should be of some comfort to investors. The final yields are very good. At the same time, from the taxpayers’ point of view, the state government paid a hefty price to secure an effective deal.

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