October 3, 2013 / 6:03 PM / 4 years ago

California law on capital appreciation bonds mostly positive-Fitch

SAN FRANCISCO, Oct 3 (Reuters) - A new California law that tightens terms on capital appreciation bonds (CABs) is mostly credit-positive for the state’s school districts but may pressure the finances of some, Fitch Ratings said in a report on Thursday.

California’s new law limits total debt service on the bonds to four times the principal and limits their maturity to a maximum of 25 years. The bill also requires CAB deals to allow early repayment of the debt when maturities are longer than 10 years.

The bill for the law, signed by Governor Jerry Brown on Wednesday, is a “credit positive overall,” the report said, adding that Fitch believes it will “mitigate the negative effects of CABs on districts’ debt profiles and reduce the volume of future CAB issuances.”

“However, the bill could lead to additional budgetary pressures for some districts with pressing capital needs,” the report said.

CABs are a form of municipal debt for which payments are deferred while interest compounds. The bonds attracted the scrutiny of California lawmakers over the past year following reports of a San Diego-area school district that issued the debt and would owe nearly $1 billion, or 10 times the initial loan.

Fitch noted the new law, which is not retroactive, will “make it tougher for those districts to issue general obligation bonds for pressing capital needs and some may resort to lease-backed debt or pay-as-you-go capital spending.”

CABs have been popular in California, Texas and Illinois and with school districts in states with fast-growing student enrollments.

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