California asks Bear if it can still underwrite debt

SAN FRANCISCO (Reuters) - California's state treasurer's office contacted Bear Stearns on Friday to check on the U.S. investment bank's ability to handle two upcoming bond sales amid the cash squeeze forcing the company to turn to the JPMorgan Chase and the Federal Reserve for funding.

Bear Stearns is senior underwriter for a refunding of $1 billion of state Department of Water Resources power revenue bonds in a sale closing on March 19, and for a sale of $302 million in state Public Works Board lease revenue bonds closing on March 26.

California expects $1.3 billion after the sales close, said Tom Dresslar, a spokesman for California Treasurer Bill Lockyer.

"Given their financial difficulties, we have been in touch with the head of their underwriting desk telling them we want a written assurance from a senior Bear Stearns official that we're going to get our money on time," Dresslar said.

"We want that assurance to come from the top of the company," Dresslar said.

Bear Stearns, in a letter to the California treasurer's office signed by Samuel Molinaro Jr., the investment bank's chief operating officer and chief financial officer, said it will be able to pay California.

"The secured loan facility provided by JPMorgan Chase & Co which we announced this morning is available to assure that Bear Stearns has sufficient liquidity to continue normal operations, fulfill its commitments and meet all obligations, including its obligations under the Bond Purchase Agreements with the State of California," said the letter, provided to Reuters by the treasurer's office.

The potential damage from Bear Stearns' meltdown on U.S. states, cities and agencies that relied on it as one of the leading underwriters in the $2.6 trillion U.S. municipal bond market goes well beyond this role.

The bank also is a counterparty for interest rate swaps, which issuers use to guard against unexpected shifts in rates. And public pension funds could have owed stock in Bear Stearns, whose price plunged 46 percent on Friday, the experts noted.

ARNOLD SHRUGS

Gov. Arnold Schwarzenegger said he is not concerned about California's upcoming debt sales.

"I'm not concerned about that at all," Schwarzenegger said in an interview on CNBC. "I think we will be able to sell our bonds. People are excited to invest in California."

California is seeing solid demand for its bonds, general obligation debt or otherwise, Dresslar said.

"If the last g.o. deal is any indication, demand is increasing on the retail side in particular," Dresslar said. "Given the upheavals in other capital markets, investors, particularly retail investors, see bonds as solid investments, and it doesn't hurt that yields at least at this point have been somewhat higher than in the last year or so."

Other states, including New Jersey and Wisconsin, said they also now will analyze whether to keep Bear Stearns as an underwriter for upcoming bond sales.

Bear Stearns was a prominent underwriter of tobacco bonds, which are backed by payments from cigarette-makers to states.

Wisconsin, for example, had chosen Bear Stearns to underwrite $1.5 billion of tobacco bonds that have yet to be sold and the bank's problems could open the door for a rival.

Bear Stearns' role as an advisor and underwriter of municipal bonds has at times been criticized.

In New York, for example, in 2000 it helped devise and underwrite a $14 billion refinancing for the Metropolitan Transportation Authority. Transit advocates still fault this borrowing as it soaks up cash the agency needs to improve train service and add new links.

SWAPS ARE DOUBLE-EDGED SWORD

States and local governments have more than $200 billion of interest rate swaps outstanding, said Robert Lamb, president of Wayne, N.J.-based Lamont Financial Services Corporation.

Peter Block, a Chicago-based analyst with Standard & Poor's Ratings Services, said "plenty" of issuers have done swaps with Bear Stearns. "The real question, right now, is whether the issuers will be secured," Block said.

Issuers with fixed-rate debt often enter into a swap that lets them pay floating rates. If the issuer's swap has a positive value, Bear Stearns would owe them money if the contract were terminated.

(Reporting by Jim Christie in San Francisco, Karen Pierog in Chicago and Anastasija Johnson and Joan Gralla in New York; Editing by Diane Craft.)