LOS ANGELES - The California Public Works Board plans tomorrow to sell its largest deal ever with a $407 million lease revenue bond issue that will fund numerous University of California projects.
Although the deal is sandwiched between some hefty recent and planned bond issues by the state and its agencies, the sale might benefit from some fortuitous timing, market participants said Friday.
Two weeks ago, for example, the state works board sold a $140 million issue in a market depressed by huge municipal supply and uncertainty over the presidential race.
By contrast, the market began rebounding last week amid suggestions that tax-exempt bond demand will grow if a Clinton administration follows through on plans to raise top tax rates.
"It was a pretty sloppy time there" for a while before the election, said Thomas Opdycke, vice president and managing director of public finance at Bank of America, senior manager of tomorrow's offering.
Now, however, Opdycke said the market might be emerging from an unsettled period and also recovering from "an indigestion problem" brought on by a supply crunch.
Those factors could help underpin tomorrow's deal, despite its large size. But uncertainty in the Treasury market, with a decline Friday ahead of the Treasury's quarterly refunding this week, also makes market conditions difficult to predict.
"We're staying away from bells and whistles" for the board's transaction, Opdycke said. Part of the reason, he added, is that the board thinks a straightforward and clean deal will be well received by investors who "are now focusing on value. "
Tentative plans call for serial maturities from 1993 to 2007, with term bonds due in 2013 and 2022.
Opdycke said "there is a strong possibility" that the serials from 1998 on out and the 2013 term bonds will be insured by AMBAC Indemnity Corp., though the details remain subject to change.
California deals featuring insurance are a new twist. The state's historic strong standing in the market often made insurance uneconomic for most transactions. But enhancement now makes more sense following a round of rating downgradings this year in reaction to serious state budget problems.
The uninsured portions of tomorrow's sale are rated A 1 -conditional by Moody's Investors Service, Aminus-provisional by Standard & Poor's Corp., and A-plus by Fitch Investors Service.
The Moody's and Standard & Poor's ratings are conditional until the state accepts all the projects as being finished, which is expected by 1995.
Recent state budget problems also affected the budget for the nine-campus University of California system. The fiscal 1993 state budget provides $1.88 billion of general fund spending to support the university system, or about $224 million less than in fiscal 1992.
In response, the system's governing Board of Regents, is eliminating Jobs, reducing equipment purchases, increasing student fees, and cutting enrollments to meet a tighter budget.
Despite the budget developments, the regents do "not expect that current state fiscal conditions will materially affect the regents' ability to pay rental as it becomes due and payable under the facility leases" tied to the lease-revenue bonds, according to the preliminary official statement for the deal.
Standard & Poor's, which gives the lease revenue bonds a "stable" outlook, said its assessment reflects the university system's "strong general creditworthiness, offset by the weakened quality of state appropriations and support; the state's involvement and history of direct appropriations for lease payments; a legal structure that includes [the university system's] covenant to budget and allocate lease payments; and strong project essentiality."
Concern arose over the state's lease bonds in late August when negotiations over California's budget dragged two months into the new fiscal year. The delay in adopting a budget raised questions over whether the state could appropriate rental payments due Sept. 1 on related bond issues.
But unlike other lease revenue bonds issued by the Public Works Board that are payable solely from state appropriations, the bonds secured by leases with the regents are payable from any lawfully available funds of the university, Moody's noted in its rating report.
Accordingly, the university system was able to use other funds in late August to assure timely payment of its lease obligations, Moody's said.
This fact is more prominently outlined in the prospectus for tomorrow's sale, compared with previous university-related financings. The language notes that "the authority of the regents to adopt a budget, and to appropriate rental payments, is not dependent upon the adoption of a budget by the state."
The new financing is subject to standard lease abatement provisions for damage, destruction, or substantial interference with the use of the facilities. The 14 projects range from science building construction to medical facility improvements.
Last fall, some institutional investors expressed displeasure with the regents' handling of a refunding because it led to a redemption of certain bonds that investors did not think would be called until 1999 at the earliest.
That controversy, which involved direct bond sales by the regents rather than issues through the public works board, forced the state to postpone the refunding temporarily until it discussed the situation with affected investors. Some of the unhappy investors then received refunding bonds at a premium as part of the state's solution.
As of late last week, it appeared unlikely that the controversy would have much effect, if any, on tomorrow's issue. But one senior portfolio manager at a huge mutual fund stressed that last year's handling of the redemption "certainly is not forgotten here." adding that his fund would not buy any bonds tomorrow unless "they're very cheap" to the market.
But another portfolio manager doubted the pricing would be affected by last year's redemption brouhaha as long as the new deal includes standard call provisions.
He added, however, that "investors are much more cautious on [the regents') calls and are going to look at the fine print."
The redemption provisions for tomorrow's sale allow an optional call after 10 years, with redemption prices declining to par after Dec. 1, 2004.
"We haven't gotten any of that feedback" regarding any need for a premium to sell this week's issue, Opdycke said. When underwriters explored pricing levels, the chance for a penalty "did not even come up as a topic in our discussions."