The New Buy America Bonds (BABS) taxable munis subsidized by Fed (Reuters)

UPDATE 3-California prepares deal as NJ Turnpike sells BABs
Mon Apr 20, 2009 10:30pm BST

By Caryn Trokie

NEW YORK, April 20 (Reuters) - California on Monday outlined for investors what interest rates they may be paid in this week's planned debt sale, the biggest on the week's negotiated calendar, which will include up to $3.5 billion of new Build America Bonds.
California is planning a six-part deal that is expected to total up to $4 billion in BABs and general obligation debt, Tom Dresslar, spokesman for California State Treasurer Bill Lockyer, said last week.

The bond offering includes: four-year bonds expected to price at a yield spread of about 50 basis points over five-year U.S. Treasuries; five-year bonds at a yield spread of about 350 basis points over comparable Treasuries; six-year bonds expected to yield about 370 basis points over Treasuries and seven-year bonds expected to yield about 362.5 basis points over Treasuries.

It also includes 25- and 30-year bonds expected to yield about 387.5 basis points over Treasuries.

"With the 30-year Treasury (yield) last at 3.70 percent, that implies a yield around 7.57 percent," said MMD analyst Randy Smolik. "This would be a net cost to the state around 4.90 percent if the price was locked in currently."
U.S. states, cities and towns are increasingly taking advantage of this new kind of taxable debt that Congress included in its stimulus plan.

Investor enthusiasm for the debt, whose interest rates have a 35 percent subsidy from the federal government, spurred the New Jersey Turnpike to move up its planned sale by one day -- and increase its size.

The $1.375 billion offering that priced Monday saved the Turnpike about $100 million, on a present-value basis, according to financial advisor Dennis Enright of NW Financial Group, based in Jersey City, New Jersey.

The deal was oversubscribed, Enright said, adding that investors included "a long list" of money managers, pension funds and life insurance companies.

The bonds, which are due in 2040, carry a 7.414 percent coupon. When the taxable debt's federal subsidy is taken into account, the taxable yields came in at about 4.81 percent, Enright said.

The turnpike also sold $375 million of tax-exempt debt with a top yield of 5.35 percent in the 2040 maturity.

Due to the surging demand, the Turnpike twice tightened yields, which were first estimated at a 387.5 basis point spread, according to IFR.




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