SAN FRANCISCO - California's Department of Water Resources, which took out a $4.3 billion bridge loan in June from banks led by J.P. Morgan Chase & Co., came a step closer to repayment of that loan late last week when the state's Treasurer said it had overcome some key barriers to the department's issuance of a record $11.1 billion bond sale.
The state would use proceeds from that sale to reimburse its lenders on what has recently become a riskier credit. In November, one month after the bond issuance was delayed, the loan converted from a bridge loan - a type of credit used to tide borrowers over until their securities are sold - to short-term financing. The terms of the loan became more expensive and contributed to downgrading of California's bond ratings by Moody's Investors Service to A1 from Aa3.
Morgan Chase, which won bidding for the position of lead underwriter of the bond issue last year, has taken $2.5 billion of the loan through its Morgan Guaranty Trust subsidiary. Other lenders include Lehman Brothers, which put up $1 billion; Germany's Commerzbank, $500 million; and Bayerische Landesbank, $300 million.
John Otis, a bond analyst at Bear Stearns & Co., said that Morgan Chase's loan exposure to California is not all that worrisome despite its size. "It's all timing," he said. "At some point California will sell its bonds."
Still, he said, the situation illustrates a risk inherent in making bridge loans. "Often the commitments are rather large, and if something happens, a bank can get stuck with a larger piece" than it would normally have with one borrower.
The state has plenty of incentives to refund its lenders as soon as possible, since in November it started paying a 2% interest penalty on the loan. The loan was originally priced at 4.14% but switched from the London interbank offered rate to the prime rate, currently 4.75%.
"We would like to see the loans paid off before June 30," said Oscar Hidalgo, a spokesman for the Department of Water Resources. "But it's probably more realistic that the bonds will be sold in the second half of the year."
So far the Department has drawn down $2.5 billion of the loan to pay for energy purposes.
Morgan Chase said in a statement last week, "There are still many hurdles to overcome, however, prior to establishing a timeline for sale." A company spokeswoman declined to discuss the terms of the loan.
