California Borrows $1.5 Billion to Pay Off Borrowed Money

Includes: JPM, SPY
by: Kurt Brouwer

The State of California just cut a deal with JP Morgan Chase (NYSE:JPM) to borrow enough money to pay back the IOUs it distributed in lieu of cash earlier this summer. This loan is a bridge loan to get the state through the cash crunch until it can sell revenue anticipation notes (RANs) next month. Looks like a good deal, albeit with some serious strings attached. In return for granting the loan, JP Morgan Chase gets first crack at selling the RANs.

California, JP Morgan Chase close $1.5 bln loan (Reuters, August 27, 2009, Jim Christie)

California will pay no fees and 3.0 percent interest on a $1.5 billion loan from JP Morgan Chase & Co that will provide the state with money to pay its recently issued IOUs, State Treasurer Bill Lockyer said on Thursday. The loan also will help bolster the state government’s cash as it prepares for a multi-billion dollar sale of short-term debt next month to raise money for its cash-flow needs.

“It’s a wrap,” Lockyer told Reuters by telephone. “It allows us obviously to accelerate the repayment of the IOUs and to have some cash cushion.”

The government of the most populous U.S. state issued the IOUs, which carry a 3.75 percent interest rate, to conserve dwindling cash during its recent budget crisis.

California is scheduled to begin redeeming the IOUs, issued to taxpayers owed refunds and vendors, on Sept. 4.

The state through Tuesday had issued 414,000 of the IOUs, technically registered warrants promising payment, worth $2.26 billion, according to the state controller’s office.

California will repay the loan from JP Morgan Chase after its planned sale of revenue anticipation notes next month, Lockyer said.

Wait for it. The clincher detail is coming:

Lockyer added that JP Morgan Chase will likely play a prominent role in the note sale.

“JP Morgan Chase should get credit for being consistently supportive of state needs,” he said. “I expect that JP Morgan Chase will have a lead role with others with that financing.”…

No doubt JP Morgan Chase will be in the catbird seat for future deals with the state.

For those who are keeping score at home. The State of California ran out of money to pay obligations to vendors and taxpayers who were owed refunds. So, it issued IOUs on which interest is due. Now, it has taken down a loan to pay off the IOUs, which were essentially borrowed money. Soon, the state will issue notes to pay off the loan.

So we have IOUs being paid off with a loan, which is being paid off with notes (borrowed money). How much has this whole fiasco cost in terms of legal fees, interest, loan placement fees on this and future borrowings?

Don’t try this at home kids.

Via: Jack H. Scaff III