The record deal is part of the state's plan to recover from its failed attempt at restructuring the electricity market. California has already shelled out more than $8 billion from state coffers to buy power on behalf of its beleaguered utilities. Proceeds from the sale will reimburse the general fund and pay for additional power through this summer. Since this is a revenue bond, a portion of the money collected from electricity ratepayers' bills will repay investors.
Some analysts wonder whether such a large issue will fly on Wall Street. California finance officials are holding conference calls to drum up interest among investors and have assigned an unusually large number of firms--26--to underwrite and market the deal.
There is also concern that the bond could cause a glut in the municipal market, and that would mean that California, as well as other state and local issuers, might have to pay higher interest rates. "The municipal market does not have the appetite to fully digest nearly $13 billion in bonds without it impacting rates," says Steven Permut, director of municipal research for American Century Investments in Mountain View, California.
The deal is critical to restoring the state's fiscal health. The power purchases have nearly wiped out what, only two months ago, looked like a fat budget surplus. Combined with the souring economy, the outlay led two bond-rating firms to downgrade California's G.O. rating.
