State to Launch 2nd Phase in Power Bond Sale

Brokerages will begin taking orders Friday from small investors who want to buy some of the power bonds California will sell next week.

The offering is expected to attract investors who are hungry for decent yields, with rates on U.S. Treasury securities near 40-year lows, analysts said.

In the second phase of the biggest municipal bond deal in history, the state will offer $6.75 billion of tax-exempt fixed-rate bonds.

Institutional investors, such as mutual funds, will bid for the bonds next week, most likely Tuesday, bankers said. Small investors’ orders will be taken before the institutional orders, from Friday through Monday.

The deal will complete a mammoth $11.9-billion bond offering, the proceeds of which will repay loans from banks and the state’s general fund that helped the state purchase power during the energy crisis of 2000 and 2001.

The bonds are being sold by the state’s Department of Water Resources.

Customers of the state’s major utilities will pay off the bonds through surcharges on their utility bills for the next 20 years.

Last week, institutional investors snapped up $4.25 billion of adjustable-rate power bonds.

The fixed-rate bonds will be offered in maturities from two to 20 years, with tax-free yields expected to range from about 2% on the shortest terms to about 5.5% on the longest terms, analysts said. The securities will be sold in $5,000 minimums.

“We think interest from individual investors will be very high in this deal, given the troubles in the equity market and the lack of supply of California long-term municipal bonds this year, said Nathan Brostrom, a vice president with J.P. Morgan Chase & Co. “However, since this is a complex deal, it’s important that investors read the prospectus and understand the risks inherent in buying a bond like this.”

Although rated investment grade by Wall Street credit-rating agencies, the bond deal has been delayed by political wrangling and legal hurdles.

Interested buyers can find the bond prospectus on the state treasurer’s Web site, www.treasurer.ca.gov. But purchases must be made through brokers. There are 32 investment firms selling the bonds, including J.P. Morgan Chase; Stone & Youngberg; Bear, Stearns & Co.; Morgan Stanley; Siebert Brandford Shank & Co.; and Salomon Smith Barney.

Bond buyers would have to open a brokerage account if they don’t have one already, bankers said.

Because the yields will be exempt from state and federal income taxes for California residents, the true returns on the bonds will be higher, depending on an investor’s tax bracket.

A tax-free yield of 4%, for example, is equivalent to a fully taxable yield (such as on a bank CD) of about 6% for a taxpayer in the combined 33.8% federal and state tax bracket.

An estimated $3.75 billion of the $6.75 billion of fixed-rate bonds sold next week will be insured, meaning they will be guaranteed against default with the backing of bond insurance firms. The insured bonds are expected to pay slightly lower yields than the uninsured bonds.

“My very conservative investors are even interested in the uninsured portion,” said Zane Mann, publisher of the California Municipal Bond Advisor newsletter in Palm Springs. “We’ve had a lot of calls from interested investors.”

On Friday, the bond underwriters will release an estimate of yields for each of the maturities, Brostrom said. If, when the bonds are finally priced next week, the yields differ from the estimates, investors who placed orders won’t be obligated to buy the bonds.