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State’s Nation-Low Credit Rating Prompts Schwarzenegger to Borrow $4.5 Billion

By Sally Maison
Published: Tuesday, October 6th, 2009

California Governor Arnold Schwarzenegger is planning to borrow $4.5 billion this week, after state funds suffered greatly from a very low credit rating. He will use the loan to support parks, schools, and hospitals as California’s municipal bond fell to its lowest in 42 years.

State’s Nation-Low Credit Rating Prompts Schwarzenegger to Borrow $4.5 BillionState’s Nation-Low Credit Rating Prompts Schwarzenegger to Borrow $4.5 BillionStandard & Poor’s, one of America’s largest financial research firm, placed the state’s credit rating at A-plus this February, giving it the lowest rating in the country. California and Louisiana currently share bottom standing, with most states either rated AA or AAA. According to S&P, they came up with the decision when they noted lack of political progress regarding budget negotiations. Analysts also say that California’s record high 12.2 percent unemployment rate does not help the cause. The McGraw-Hill firm adds that imminent recovery for California is yet out of sight. However, Gov. Schwarzenegger aims to disprove that.

Schwarzenegger signed a bill allowing California to engage in a municipal bond sale worth $4.5 billion this Tuesday. Legislators hope that the sale of tax-exempt bond will encourage investors and thus stimulate monetary flow. This is California’s first long-term bond offering in nearly eight years. Analysts noted that companies have either been reluctant or doubtful in making investments because recovery remains uncertain. Heavy demand for municipal issued bonds left many investors fighting for what little is available, which lowered yields of on long-term tax free bonds.

The deals will be officially priced on Thursday but many individual and institutional investors are expected to keep track of Tuesday’s affairs. A municipal representative says that the level of participation on Tuesday could determine the state’s future.

Analysts believe that the long-term, fixed-rate debts offered to investors would increase California’s chance of getting a credit rating. Finance experts point out that better credit ratings are significant in a government unit’s progress. These are just like individual credit scores which are used to assess a borrower’s ability to pay, according to them.

Experts add that the Golden State will be able to borrow funds for government projects if its ratings improve soon. Specialists add that ratings by Nationally Recognized Statistical Rating Organizations (NRSRO’s) such S&P and Moody’s greatly influence the decision of investors and lenders alike. They point out that NRSRO releases are what FICO scores are to consumers. Market analysts predict that once California’s credit rating starts to rise, commercial activities will increase as well. This could finally lead to the economic recovery that the state has always envisioned, according to a government spokesperson.

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