California budget crisis drags on as federal government declares IOUs investment securities

By Aaron Hochman-Zimmerman and Sheri Kasprzak

New York, July 10 - The State of California continued to dominate municipals headlines as the week wound down. The federal government on Friday declared the state's IOUs to be investment securities with a secondary market expected to follow, according to a market source reached during the day.

Meanwhile, one sellside source said Friday that several banks are now refusing to accept the state's IOUs in lieu of cash, and the state may be forced into finalizing a budget.

"This may force the governor's office and Republican and Democratic legislators to get serious about settling on a final budget as, if vendors cannot cash out their IOUs, they may not be able to pay subcontractors or make payroll," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC.

The banks not accepting IOUs include Bank of America, Citigroup and JPMorgan.

Elsewhere around the municipal market, the crisis seemed fairly contained.

A senior trader was busy all week with local high-yield paper in the Great Lakes region. "We haven't been doing much of the other stuff," he said.

"Southern [Minnesota Municipal Power Agency] was the big deal of the week," he said about the local deals.

California was not spreading much toxicity into the broader market.

"There was pretty good follow through in high-yield paper," he said, and "there was good retail demand."

The upcoming calendar looks thin, but current strong demand, especially for Build America Bonds, looks to continue, he said.

People are talking about "the stock market fading," he said, which would naturally "put more money into bonds."

The strong demand for bonds also seems to be encouraged by new indexes and funds that many investment houses are developing and selling.

The municipal market may "have a good time for a while," he said.

Pennsylvania budget troubles

California isn't the only state struggling to come up with a budget. Pennsylvania Gov. Edward Rendell said during the week that he doesn't know which of the state's vendors will be paid in the absence of a budget.

LeBas said Friday that he doesn't foresee Pennsylvania issuing California-style IOUs, but Rendell has told vendors to "hang in there" and continue to supply goods to the state under the threat of terminating government contracts.

L.A. sells $1.04 billion TRANs

In other news, details were released Friday on the City of Los Angeles' $1.039 billion in series 2009-10 tax and revenue anticipation notes.

The notes (MIG 1/SP-1+/F1+) priced Thursday through lead manager Goldman, Sachs & Co. The co-managers were J.P. Morgan Securities Inc., Loop Capital Markets LLC and RBC Capital Markets Inc.

The notes are due May 28, 2010, and have a 2.5% coupon priced at 101.762, said an official statement.

Proceeds will be used to provide effective cash flow management for revenues and expenditures.

Campbell County coming

Campbell County, Wyo., announced plans to offer a $150 million series 2009A solid waste facility revenue bond for the Basin Electric Power Cooperative - Dry Fork Station Facilities, according to deputy county attorney Carol Seeger.

The bonds are expected to price on Thursday.

Goldman Sachs will act as underwriter for the negotiated deal.

Proceeds from the sale will be used to finance the construction of a solid waste facility.

The Campbell County seat is located in Gillette, Wyo.

Wake County deal

In other upcoming deals, Wake County, N.C., is set to sell $158.815 million in series 2009A TECO project limited obligation bonds, said a preliminary official statement.

Citigroup Global Markets Inc. and Merrill Lynch & Co. Inc. are the lead managers for the bonds (Aa1/AA+/AA+).

The bonds are due 2012 to 2029 with term bonds due 2032 and 2036.

Proceeds will be used to expand the Hammond Road Detention Center in Raleigh.

The county seat is Raleigh, N.C.

Also out of North Carolina, the County of Mecklenburg plans to sell $120.115 million in series 2009D variable-rate general obligation refunding bonds, said a preliminary official statement.

The bonds are due March 1, 2026 and initially bear interest at the windows interest rate.

The bonds will be sold through Citigroup.

Proceeds will be used to refund the county's series 2002C and 2005B bonds.

Charlotte, N.C., is the county seat.

Secondary market

Moving to the secondary market, traders said the market firmed to close out the week, repeating a trend throughout the week.

"Volume was pretty light," said one trader reached during the afternoon.

"Some stuff is moving, but what we are seeing is little changed."

Looking to trading action, the various purpose revenue bonds recently priced by Orange County, N.Y., were seen moving by one trader. The 4.125% 2028 bonds were seen at 4.32%.

Elsewhere, the series 2009C revenue bonds issued by Miami-Dade County, Fla., were also traded. The 5.75% 2039s were seen at 5.6% Friday afternoon.

In other trading news, the University of North Carolina System pool revenue general trust bonds were in action. The 5.125% 2034 bonds were seen at around 5% Friday.

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