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Alum Trio Negotiates California Credit
November, 2003 Last June three Business School alumni arranged the largest ever one-day municipal bond sale to keep the state of California from falling into an even worse budget crisis. Newly elected state controller Steve Westly, MBA '83, worked with chief deputy controller Mark Battey, MBA '84, and financial advisor Paul Rosenstiel, MBA '83, to organize the complex Internet auction. The event was over in an instant but took four months to arrange because of uncertainty surrounding the state's deteriorating financial condition. The stage was set in January, when Gov. Gray Davis announced a $38 billion budget deficit. California needed to borrow $11 billion to get through the summer—a huge loan in the municipal bond market even under the best of circumstances, according to Rosenstiel, who is a partner in municipal bond investment bank E. J. De La Rosa & Co. But California was falling out of favor with bond market participants concerned about the growing deficit. The state suffered downgrades of the credit ratings on its debt in December and again in February. Because the Securities and Exchange Commission limits the amount of lower rated short-term notes that managers of money market funds may buy, Westly explained, "it was clear to us that the state, on its own, was not going to get the credit rating it needed to sell all the notes." So the state's team negotiated "nearly around the clock for several weeks," he said, to convince seven commercial and investment banks to provide a form of credit support for the one-year notes in order to raise the credit rating. The notes sold on June 11 with 10 investment banks paying an average rate of 1.13 percent. The timing proved critical. Just a month later, after the state missed its deadline to pass a budget, the state's credit rating was dropped to nearly junk bond status by Standard & Poor's and interest rates on state bonds jumped sharply. |
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