DWR Holds 2d Retail Investor Parley Before Next Week's Sale

The California Department of Water Resources this afternoon will hold the second of two conferences for retail investors in hopes of attracting the widest possible investor base for $6.75 billion in tax-exempt fixed-rate power purchase revenue bonds expected to price next week.

Morgan Stanley & Co. is the California retail manager on the deal, and UBS PaineWebber Inc. is the national retail manager, heading up nine other underwriting firms in the retail bracket. Senior manager for the entire deal is J.P. Morgan Securities Inc., selected last year by the DWR to head a group of 31 other firms, one of the largest set of firms ever assembled for a single bond deal.

Bankers working on the largest municipal bond issue ever invited potential retail investors to the conferences yesterday in Los Angeles and today in San Francisco. A similar presentation made its way on a seven-city road show during the past three weeks for institutional buyers. The retail conference may be shortened slightly from the original one hour and 20 minutes. The DWR plans to offer a two-day retail order period early next week ahead of an institutional pricing. About 60% of the bonds are expected to carry insurance from various companies. The department, which began purchasing power for the state's utilities last winter, also will issue between $800 million and $950 million in taxable fixed-rate bonds late next week.

Officials speculate that between 3% to 12% of the fixed-rate bonds could sell to retail investors. The DWR last week sold $4.25 billion in various floating-rate bonds, targeted more to institutional investors.

While retail investors often prefer the safety of insured municipal bonds, many may be attracted to the higher yields expected on the uninsured portion of the deal, which has underlying ratings of BBB-plus from Standard & Poor's, A3 from Moody's Investors Service, and A-minus from Fitch Ratings.

"My impression is that there is going to be great interest in the uninsured portion," said Zane Mann, editor of the California Municipal Bond Advisor newsletter, which focuses on individual investors. "People are assuming these uninsured bonds will be yielding above the market."

At least one observer wants to be sure individual investors are aware of some potential problems they may have should they want to sell their bonds before they mature.

Kevin Olson issued a general advisory Friday on his Web site, municipalbonds.com, warning investors that they have no guaranteed secondary market in which to later trade the bonds.

The site generally tracks trading information on municipal bonds and flags excessive markups on certain transactions.

"This deal has attracted wide attention, so an advisory was called for," Olson said. "This is one of the first bond deals where I've actually seen newspaper commentators and columnists get involved and ask, for their readers, if this is a deal they should be interested in."

The advisory could be applied to the entire municipal bond market, according to Olson, but is especially important to note on the largest municipal bond deal ever.

"There are just a lot of bonds, and they will have to get out to just about everybody," including retail, he said. "Institutional buyers understand this, but I don't know if the retail side knows about it, let alone understands that there are no guarantees."

However, Mann notes that many retail investors tend to hold bonds until maturity.

J.P. Morgan declined to comment on Olson's advisory.

Proceeds from the bonds will pay back more than $6 billion in loans from the state and $3.5 billion in outstanding banks loans taken out last year to purchase power during California's energy crisis.

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