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State Electricity Bonds May Prove Attractive to Investors

State Electricity Bonds May Prove Attractive to Investors

Wall Street West by Benjamin Mark Cole

The energy crisis ended last year but in its aftermath the state of California is hoisting a huge $11.1 billion bond offering to finance energy-purchase deals inked during the worst moments of the crisis.

For investors, blame for the crisis is a secondary issue. The more immediate question is whether these bonds, expected to be tax free and offered in the fourth quarter of 2002 or the first quarter of 2003, are a good buy? The experts usually advise younger, longer-term investors in all but the highest tax brackets to weight their portfolios toward stocks, which historically have outperformed bonds.

But stocks remain in the doldrums, and yields on the new state IOUs are likely to be relatively rich. They might be worth a look by a broader audience than usual, according to Robin Rapaport, senior municipal credit analyst with Payden & Rygel, the $40 billion money management shop in downtown Los Angeles.

The bonds will be paid back by statewide surcharges on electric bills. They aren’t particularly risky. “Under California law, the power bonds have to be investment grade (California’s general obligation bonds are rated A+ by Standard & Poor’s and A1 by Moody’s Investors Service.). They are not going to be junk-status. They have to be structured in a way that is relatively secure, although revenue bonds (such as these) generally have a higher yield than state general obligation bonds,” Rapaport said.

Some other factors might make the long-term bonds attractive. California is suffering from state budget problems, adding a hint of uncertainty to the picture, and thus higher yields.

Too, the size of the offering will be record-breaking, perhaps swamping the market. Add to that an investing public wary of the possibility of reignited inflation, and thus timid about buying long-term bonds. “There may not be enough players in the market to take down that much paper,” said Rick LaCoff, senior analyst with Payden & Rygel. “That will make the paper cheaper” and thus yield a higher return for investors. “A lot will depend on market conditions at the time, and we can’t predict that.”

With all that, yields on the state bonds might end up 30 to 40 basis points above normal for a state-backed bond. (A basis point is one one-hundredth of a percentage point.) Good-quality, tax-free long-term municipal bonds were yielding a little above 5 percent last week. Not a thrill ride, but a lot better than stocks have been doing the last two years.

Start-Up Engine

When Imperial Bank was acquired by Detroit-based bank Comerica Inc. in January of 2001, there was concern that Southern California lending might be cut back. Imperial had roots here and was willing to lend to start-ups, in exchange for good interest payments, and some warrants. Who knew whether conservatively run Comerica would continue that tradition.

But if anything, Comerica has boosted its start-up lending, said Christopher Woolley, managing director for the Technology and Life Sciences Division of Comerica’s Pacific Southwest region. Not only is Comerica willing to lend to promising start-ups, it has charged Woolley with also financing “second-stage” or nearly break-even growth companies.

“We have actually added resources since the merger,” Woolley said. “And turnover has been minimal. I would say 90 percent of the people who were with Imperial are with us today at Comerica.”

One aspect of the old Imperial Bank was its willingness not only to extend loans, but take warrant positions in venture-backed start-ups. Eventually, the old Imperial ended up with equity stakes (on paper anyway) in more than 700 companies. The complicated batch of ownership positions compelled Imperial to create a special unit just to manage the hundreds of investments.

By the late 1990s, Imperial looked fabulously smart so many tech companies were launching IPOs at fantastic valuations. While the tech bubble has long since burst, Comerica is not backing away from taking warrants. “Right now we have stakes in more than 800 companies,” Woolley said.

Though some of Imperial’s warrant positions have become worthless, the bank was often the senior lender and got its money out of bombs before even the earliest venture investor. As start-ups became better financed in the late 1990s, Imperial still kept a lid on the size of loan it would extend. It didn’t want any “boulders” in its portfolio of venture loans. Getting a $1 million loan repaid from a $50 million start-up is easier than getting it from a $5 million start-up. So even as tech outfits tumbled like ten pins, Imperial usually got its money back, if no bragging rights about warrant profits.

Woolley expects to see good and tough times again, especially in Comerica’s Westwood tech-lending offices, run by Scott Lane and David Wisner. “You see it (cycles) in real estate, you see it in tech and biotech, you see it in the stock market, in the economy,” Woolley said. “All you can do is keep going at it.”

Web Analyst

Do investors want another Wall Street-oriented Web site?

David Frazier, former stockbroker at Waterhouse Securities, credit analyst for Dun & Bradstreet, stock market researcher, money manager and investment banker, is betting they do.

The problem with most Wall Street Web sites is that they don’t give honest advice or collate economic data in a digestible format, said Redondo Beach-based Frazier, founder of Frazier Research & Analytics and frazierresearch.com. “Look at the sites out there. Look at theStreet.com. It is worthless,” said Frazier. “They don’t tell you how to invest.” And sites that make recommendations are often just running “pump-and-dump” schemes, he added.

Frazier’s site has lots of financial and economic data and specific recommendations, all archived. For some time, he has produced stock market reports on individual companies, sometimes accepting pay from the companies he covered. (It’s legal to do so, as long as it’s disclosed. Wall Street firms don’t, but have been criticized for linking favorable coverage to invesment banking fees.)

For the time being, Frazier’s Web site is free to all, though he plans some day to charge a fee. His favorite stock right now is San Jose-based HPL Technologies Inc., which makes software which speeds up semiconductor production. HPL didn’t pay for the coverage, Frazier said.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at


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