The Bonds represent the first State of California transaction – and only the fourth overall – to use Clarity as the weekly rate setting platform
After SWS’ initial rate setting, the Bonds are to be remarketed weekly on the Clarity Bidrate Alternative Trading System. The Series 2020A Bonds were the State’s first issuance of VRDBs since 2005.
The Bonds bear interest in weekly mode, set on an ongoing basis on each Wednesday on the Clarity platform with a maximum annual rate of 11.00%, payable on the first business day of each month. On each Wednesday (the rate setting date), investors may place and edit bids until 1 pm ET. All bids are published on Clarity in real time and all investors can see the interest rates and par amounts – but not the investor names – of all other bids. The combination of real-time market transparency, the ability to see all bids in comparison to the market, and the ability to edit bids until the cutoff time creates a highly competitive marketplace. The new interest rate is then published at 1:30 pm ET on that Wednesday and is effective on that Thursday. The Bonds are secured by the full faith and credit of the State of California. The Bonds’ credit and liquidity are supported by an irrevocable direct-pay letter of credit issued by State Street Bank and Trust Company, which is set to expire in November 2022.
While short-term interest rates had jumped at the onset of the COVID-19 pandemic, they had since reached near 0% levels. Given these very low rates, transaction size also appeared to be a factor in the remarketing levels of VRDBs. The State’s two series of existing weekly VRDBs with a par amount of $100 million or greater had most recently reset at SIFMA -2 and SIFMA flat VRDB spreads typically tighten after the initial rate-setting. Despite investor resistance to very low rates in the short-term market, SWS was able to successfully execute the transaction through thorough investor education and extensive premarketing. SWS engaged with a number of accounts in the week prior to pricing in order to generate interest in the product and garner participation.
Prior to pricing, SWS and the financing team worked closely with key investor accounts to answer questions and address any concerns. During the order period, 7 investors placed a total of $210.0 million in orders against $100.0 million in par, including one investor who was new to the Clarity platform. Given this strong demand, SWS was able to lower the initial rate by 2 bps.