LOS ANGELES -- California plans to seel its first warrants in a decade tomorrow with an estimated $400 million sale that will enable the financially troubled state to pay its bills through June 30.
The revenue anticipation warrants, structured like a short-term note and issued through competitive bid, with be dated June 25 and mature July 24.
California expects to have ample resources to redeem the warrants on JUly 24, even if state leaders fail to pass a budget for fiscal year 1993, which begins July 1. As an added precaution, however, the state has entered into a standby agreement with two banks to ensure bidding for a refunding warrant deal if needed.
All three rating agencies cited the bank agreement as an important security feature in rating the warrants. But while two agencies assigned the warrants their highest grades, Standard & Poor's Corp. rated them SP-1 instead of SP-1-plus. Moody's Investigators Service rated the warrants MIG-1, and Fitch Investors Service rated them F-1-plus.
Unlike a competitively bid general obligation bond sale by the state, tomorrow's warrant issue could be won by various bidders rather than by one syndicate, according to Hal Geiogue, assistant state treasurer.
Under the tiered-bidding system the state is using for the warrant sale, underwriters will bid on traches that can range from a minimum of $25 million to an amount equaling the entire deal.
"You could have multiple winners," Mr. Geiogue said, because the state will start with the lowest interest rate submitted and go up the scale until it has approved enough bids to meet its cash needs.
California believes the tiered-bidding system will produce a better price for the state. New York has used a similar selling strategy for not issues.
Market participants predict strong interest in the sale.
"All your major players will be in," said W. Peck Ferrin, vice president and manager of municipal trading at Bank of America. "Everybody just steps to the plate when California sekks [debt], whether it's GOs or warrants. Politically, everybody has to be there."
A New York-based trader predicted the issue would "do very well," with the short-term maturity making the tax-exempt warrants attractive to mutual funds.
Gray Davis, the state controller, initially sized the warrant deal at $750 million but lowered it to an estimated $400 million because of an improving cash situation. The controller said he will set the actual issue size today using latest cash-flow information.
California's cash situation has not improved enough, however. Chronic budget problems have forced the state to rely on a warrant sale for the first time in 10 years. The state expects a cash shortfall of about $300 million in the current fiscal year; proceeds from the warrant sale will cover that gap and provide a reasonable reserve.
Security for the warrants will consist of so-called unapplied money available in the state's general fund when the warrants mature.
To the extent necessary to pay the warrants, unapplied money can include transfers from an economic uncertainty fund, internal borrowing from other special funds, and proceeds from any revenue anticipation notes issued once the state adopts a fiscal 1993 budget.
According to an information memorandum for the warrant issue, the state anticipates sufficient unapplied money in the general fund to redeem the warrants at maturity.
Even under a worst-case scenario, where a new budget would not be approved by July 1, state officials estimate they will have $1.13 billion of excess resources available to redeem the warrants, meaning 2.83 times coverage on an issue of $400 million.
The $1.13 billion figure factors in internal loan resources and ongoing state receipts, such as sales, personal income, and corporation taxes. The state's estimated tax receipt in July, prior to the warrant redemption date, should total about $1.5 billion, according to the controller's office.
Having the excess resources also indicates, however, that the state will simply not pay more than $1.4 billion of its other bills by July 24. The lack of a budget would force the state to give employees and other creditors i.o.u.'s in the form of registered warrants instead of checks, according to the state controller's office. The i.o.u.'s could then be cashed when the state has enough money.
State officials have indicated a desire to avoid the hassle and embarrassment of using registered warrants, which must be issued to individual creditors. So instead, the sale this week will include the use of so-called reimbursement warrants, an alternate internal procedure by which the state establishes a general cash revolving fund.
Without a budget, the state lacks authority to make many of its payments once the new fiscal year begins July 1. California would still pay constitutionally mandated obligations, such as debt service and school funding, but it would use the registered warrants to pay items such as salaries and utility bills.
By contrast, if the state leaders approve a budget by July 1, California projects it will have about $2.3 billion of excess resources available to redeem the warrants July 24. Although state disbursements would increase with an approved budget, the state also assumes it would raise $2.3 billion through an interim note issue prior to its annual revenue anticipation note sale.
If sufficient money is unavailable to cover the warrants on July 24, the state has enhanced its ability to redeem them by entering a standby agreement to guarantee bidders for a warrant refunding issue.
Under the agreement, California will pay a commitment fee to Morgan Guaranty Trust Co. and Bank of America. In exchange, the banks agree uncorditionally to bid on a refunding warrant sale. Other firms also could bid on a refunding issue, which would mature Sept. 30, 1992.
The California Department of Finance estimates that the state must close a budget deficit of almost $11 billion, based on an 18-month period extending from last January through June 1993. Gov. Pete Wilson. a Republican, and leaders of the Democrat-controlled state Legislature are negotiating potential solutions.
Without other adjustments, the finance department said, general fund spending in fiscal 1993 must decline to $38 billion, down $6 billion from fiscal 1992 levels.
In its warrant rating, Moody's said it is "likely" to downgrade the state if a budget is not in place by June 30 and California issues registered warrants. Even if a budget is adopted on time, Moody's plans to review its Aa1 rating of the state's general obligations bonds.
"The review will consider the seriousness of the budget problem faced ... and the extent to which the adopted budget offers a credible and comprehensive plan for achieving recurring fiscal balance in a context of continued economic weakness," Moody's said.
Standard & Poor's rates the state's GOs AA, and Fitch rates them AA-plus. Both those agencies also have cautioned that down-grades are possible because of the state's financial weakness.
