* Loan terms include no fees, 3.0 percent interest
* Loan will help speed IOU payments, treasurer says
* JP Morgan Chase may have lead role in RAN sale-treasurer
(Adds details, background, interview with treasurer, byline)
By Jim Christie
SAN FRANCISCO, Aug 27 (Reuters) - California will pay no fees and 3.0 percent interest on a $1.5 billion loan from JP Morgan Chase & Co JPM.N 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.
Lockyer is planning to sell $10.5 billion of the short-term debt to raise proceeds for the state government’s cash-flow purposes. But he is prepared for a smaller sale of $7.8 billion of the notes if Gov. Arnold Schwarzenegger and lawmakers approve measures to defer some payments, the treasurer said.
A date for the note sale has not been set but Lockyer has said he is planning to hold the sale in mid-September.
NOTE SALE CRITICAL FOR STATE
Lockyer said he expects strong orders from individual and institutional investors for the notes: “The general view in the financial community is that there will be significant demand.”
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.”
“They were the most accommodating of the Wall Street firms,” Lockyer added. “Most of the commercial banks, because their reserves are so stretched, don’t have the capacity to do that sort of thing.”
Terms of the $1.5 billion loan come as concerns about California’s finances ease a bit on Wall Street.
Fitch Ratings on Wednesday removed California’s general obligation debt from alert for a possible downgrade, citing recent actions by the state’s government to tackle its cash crisis.
Fitch affirmed California’s GO rating of BBB, or two notches above speculative, or “junk” status, and said the ratings outlook is stable.
Fitch applauded budget revisions in July that closed an expected $24 billion deficit and provided the state with enough cash flow flexibility to cover near-term needs, including money to repay IOUs.
California’s government, however, still faces serious challenges as recession grips the state’s economy and slashes revenues, said Fitch analyst Douglas Offerman.
That makes California’s RAN sale next month critical for the state government’s near-term finances. “It’s essential that they be able to successfully close a RAN sale to even out their cash flow,” Offerman said.