During the period of September 21-23, California plans to sell $10.5 billion of so-called revenue anticipation notes (RANs) to raise money for the state government’s cash-flow needs and repay its $1.5 billion loan from JPMorgan Chase & Co. (JPM).
Last week, JPMorgan purchased $1.5 billion of California’s short-term, “interim” revenue anticipation notes according to a lending agreement with the state. The amount was provided to the state to help it pay some of its recently issued IOUs during the budget crisis.
To conserve declining cash during its recent budget crisis, the state had issued the IOUs at an interest rate of 3.75%. Per the contract, California will pay 3% interest to JPMorgan on those notes.
The new RANs will mature next spring. The securities will be lucrative to individual investors as the notes should offer higher returns than money market funds and other short-term accounts.
Some muni bond analysts expect the annualized interest yield on the RANs to be between 2% and 3%. For California residents, the interest receipt would be exempt from state and federal income tax.
The retail period for the sale of RANs will be September 21 to September 22, followed by an institutional order period September 23.
However, according to the agency, the government of California still faces serious challenges as the recession mauls the state’s economy and hacks revenues.
We expect the selling of RANs to help bolster the California government’s financial position for the time being.
Last month, some of the largest U.S. banks, including Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) and JPMorgan were unwilling to cash the state’s IOUs despite requests from the State Treasurer.
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