Recall Election Likely to Have Impact on State's Bond Rates

WALL STREET WEST

Call it the Schwarzenegger Bounce. The day after Arnold Schwarzenegger announced his candidacy to replace Gov. Gray Davis, prices on the state's bonds rose three quarters of a point.

The municipal bond market has spoken. Arnold is OK in California. For proof, look at the $1.7 billion sale of general obligation bonds on July 1. The biggest bond issue, $265 million, was priced at par with a 5 percent coupon over 30 years.

This is the most recently issued bond, in the largest maturity. It isn't insured, rated A3 by Moody's, A by Fitch and BBB by Standard & Poor's. So you get a true read on how the state trades on its own credit.

In mid-July, these bonds were trading at around par prices that is, at 100 to 101 or so. By the third week of July, as state lawmakers continued to argue over the budget, the price sank to between 94 and 95. Later, they fell to between 93 and 95.

On Aug. 6, the day Schwarzenegger announced he would run against Davis, the average price of the California bonds was 94.22. The next day, it was 94.99. By Aug. 11, the bonds rose to 95.26.

Who could blame bond buyers? Before Schwarzenegger entered the race, there was an unseemly hodgepodge of candidates, including comics, columnists and pornographers.

Schwarzenegger isn't a politician, versed in the art of compromise. Usually a negative, this may be his biggest plus, second only to his colossal name recognition. Compromise has become rarer in Sacramento anyway.

Schwarzenegger says he wants to make California more business-friendly. He is a self-made man. He was an anti-Socialist back home in Austria, and it's safe to say he will fight against confiscatory taxes.

Some investors don't believe the recall will influence California's bond prices until it's clearer how Davis or a new governor would tackle the next deficit.

The recall is being approached "as if it's a popularity contest," said Joseph Darcy of Dreyfus Corp. in New York. He helps oversee $14 billion in municipal bonds, including $2 billion in California-specific funds.

Schwarzenegger and other candidates "have not come forward with any concrete plans as to how they're going to deal with the state's budget difficulties going forward," Darcy said.

Davis proposed "some fairly effective ways to approach the deficit back in January but then it just stopped in the Legislature," said David Blair, a senior analyst in Irvine for Nuveen Investments, which oversees $52 billion of municipal bonds.

A new governor may make more progress or "you could have someone who comes in who doesn't have strong leadership qualities," he said. "You could either have a weak governor or a further politicized environment."

Joe Mysak, with Dennis Walters, both of Bloomberg News

Rescue From the Brink

The financially strained operator of Los Angeles' Mondrian Hotel got breathing room as a lender granted a two-year extension on $285 million in loans that had come due.

Earlier this month, Deutsche Bank agreed in principle to extend repayment of the two loans, after granting Ian Schrager Hotels a previous 30-day extension in July. Schrager Hotels will have until August 2005 to pay off the principal.

The hotel chain, which is co-owned by Ian Schrager and New York investment firm Northstar Capital, has been hit hard by the recession and inefficiencies in its operations.

Schrager Hotels sought extensions on the loans which consisted of a $185 million securitized loan as well as a $100 million mezzanine loan held by Deutsche Bank after the company went into technical default, according to ratings agency Standard & Poor's. Company officials denied it ever defaulted on the loan.

In late July, Schrager Hotels also obtained a $16 million financing package from Canyon Capital Realty Advisors for its shuttered Miramar hotel in Santa Barbara. The proceeds from the loan went to repay a $16 million loan from Santa Barbara Bank & Trust that went into default two months earlier.

While Schrager Hotels has gained some breathing room, it still has other loans to deal with. In October, Schrager will have to repay, restructure or extend a $76 million construction loan held by three banks, including Chicago-based Corus Bankshares.

The hotel operator is also seeking new loans on two of its hotels, including New York's Hudson, in order to whittle down its other outstanding debts, its outside spokesman, Mike Sitrick, confirmed.

RiShawn Biddle

Early Numbers

Los Angeles-based real estate investment trust Maguire Properties Inc. reported results last week for the four-day rump period between its June 26 initial public offering and the June 30 end of its second quarter. The results essentially meaningless as a measure of its performance netted out to a loss of $46.2 million, or $1.25 a diluted share, including charges related to Maguire's IPO.

The owner of downtown highrises, including Gas Co. Tower and US Bank Tower, didn't provide a breakout of the comparable year-ago period, but in a later 10Q filed with the Securities and Exchange Commission it gave details of its performance for the first six months of 2003.

For that period, Maguire Properties and its predecessor, Maguire Partners, lost a combined $48.4 million, versus a loss of $4 million for the predecessor company in the like year-ago period.

The IPO and associated financial restructuring vastly change Maguire Properties' outlook for the future.

The company projected earnings of between 55 cents and 62 cents a share for the second half of the year, and said funds from operations, a common measure of cash flow for REITs, would range between 94 and 98 cents.

REITs receive favored tax status in exchange for distributing most of their income to shareholders in the form of dividends. In its 10Q, Maguire Partners said it intends to pay a pro-rata distribution from June 27, its first day as a public company, to the Sept. 30 end of the third quarter based on a rate of 40 cents per share for the full quarter.

With the stock trading around $20 a share last week, the projected dividend yield works out to about 8 percent.

Anthony Palazzo

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