California Water Resources Bond Expands

A $2 billion bond sale by California's Department of Water Resources saw strong demand from individual investors looking for additional yield in a market starved for new deals.

Almost half the issue $966 million had been sold to retail investors. Backed by rates revenue and with solid credit ratings, the bonds are seen as safer than the state's general-obligation bonds. Extraordinarily strong investor demand for highly-rated California Department of Water Resources bonds enabled the agency Wednesday to expand the offering by $970 million to $2.97 billion.

Lead book running underwriter for the huge deal Morgan Stanley & Co said the bonds had been verbally awarded at yields that ranged out to 3.80% for debt maturing in 2022. Benchmark 10-year bonds offered a 3.61% return. That's more than a 10-year Treasury bond that traded Wednesday morning at about 3.54%.

"To a California investor, the tax equivalent yield, taking into account both federal and state taxes, is pretty attractive for an intermediate bond," said Dan Solender, Director of Municipal Bond Management at Jersey City-based Lord Abbett.

The hike in amount was the day's second after a report by State Treasurer Bill Lockyer's office that individual investors Monday and Tuesday had signed on for $1.27 billion, or 63.5%, of the original $2 billion. When offered to institutional investors, demand just as intense, and the offering was lifted to $2.74 billion and then to $2.97 billion. Yields were left mostly the same as earlier, ranging from 0.92% in 2012 to 3.80% in 2022. A 2012 maturity, at 0.92%, offered three basis points less than earlier in the day. A 2011 maturity wasn't reoffered publicly.

The power revenue bond issue now becomes the largest tax-exempt bond sold this year, replacing a previously top-ranked $2.5 billion issue by the state of California itself. The Golden State is far and away the largest seller of bonds among states. The bonds will refinance debt sold in 2001 and 2002 during California's energy crisis, when the water department borrowed to finance the purchase of electricity for hard-pressed publicly listed utilities.