July 14 (Bloomberg) -- California’s credit rating, the lowest of all U.S. states, was cut for the second time in as many weeks amid lawmakers’ failure to close a $26 billion deficit that left the most-populous state issuing IOUs to creditors.
Moody’s Investors Service said it lowered California’s credit rating two steps to Baa1 from A2 and said it could be reduced further if legislators don’t quickly address the state’s cash problem. The new grade is three levels above non-investment grade. Fitch Investors on July 6 lowered its evaluation of California’s general obligation bonds by two steps to BBB from A-, placing the debt two ranks above so-called high-yield, high- risk junk ratings.
California this month began issuing IOUs to pay some creditors, a step taken only once before since the Great Depression, because of a political stalemate over the gap in the $100 billion annual budget. The bid to rewrite the spending plan for the year ending June 30, 2010, comes just five months after leaders agreed to raise taxes and slash spending in a bid to shore up the state’sfinances amid the national recession.
“Moody’s believes that as the days and weeks go by without enacted solutions to the current cash crisis and the $26 billion budget gap, the risk to priority payments, and eventually debt service payments, is increasing,” Moody’s said in a statement. “The downgrade incorporates the risk we believe exists at the current time, as well as the state’s inability to solve the current difficulties in a timely fashion.”
General-Obligation Debt
The Moody’s reduction affects about $72 billion of general obligation and lease supported bonds. Moody’s at the same time also lowered its rating on the state’s taxable bonds and debt sold for stem cell research, to Aa3 from A2.
The cuts by Fitch and Moody’s place California’s credit rating where it was in December 2003, when Schwarzenegger tightened the state’s fiscal bind by honoring a campaign pledge to slash a car tax. Before the end of the Cold War, which battered military contractors in California, the state had the highest credit rating from all three bond rating companies.
Standard & Poor’s gives the state its A grade, the sixth- highest of 10 investment levels. The firm reaffirmed that assessment on July 1.
Bond Prices
California’s worsening financial crisis has weighed on the prices of California bonds, pushing up the yields compared with top-rated municipal securities. A state general obligation bond maturing in 2023 traded today for 96.25 cents on the dollar to yield 5.38 percent, 1.35 percentage point more than tax-exempt bonds with the highest credit rating, as measured by Municipal Market Advisors Inc.’s indexes.
Even with the credit rating tumbling, investors say there is little risk of default. California Controller John Chiang resorted to issuing IOUs to insure that the state would have enough cash to make payments that have the highest priority under the state constitution, including those on its bonds, if there is a prolonged battle over the budget. Chiang said the IOUs mean the state should have funds to meet those obligations through September.
Yesterday, New York-based BlackRock Investments LLC, said that the crisis may present investors with an opportunity to buy bonds issued by the state.
“While it’s too early to speculate as to whether we’ve seen the bottom, the assumption of a resolution and our belief in the state’s long-term viability could translate into an opportunity to buy California munis at attractive levels,” BlackRock wrote in a note to clients.
To contact the reporters on this story: Michael B. Marois in Sacramento atmmarois@bloomberg.net; William Selway in San Francisco atwselway@bloomberg.net.
