Gov. Arnold Schwarzenegger and the California economic recovery received a pat on the back from Moody’s Investors Service, which raised the state’s general obligation (G.O.) bond rating to A3 from Baa1. Equally important, Moody’s also changed its outlook on California to “positive” from stable.
The rating agency attributed the upgrade to indications of an economic recovery, along with the elimination of liquidity concerns since voters approved $15 billion of deficit bonds earlier this year. The rating and outlook changes affect approximately $45 billion outstanding G.O. bonds, including California’s general fund-enhanced tobacco settlement bonds
Reverses Downward Trend
The upgrade is significant because it reverses a downward trend in credit ratings over the last few years, which had reduced the state’s rating from AA to Baa1. If the other credit rating agencies follow suit – and we are confident they will – it would mean substantial savings for the state on future borrowings.
Gov. Schwarzenegger called the upgrade “fantastic news” and a “strong vote of confidence from Moody’s.” He pointed out, however, that the Legislature still needs to approve a balanced budget by July 1.
The governor is not the only one gratified by the Moody’s upgrade. Investors are, too.
In our commentary last year, we weighed in on a Newsweek cover story, “California in Crisis,” which highlighted the economic and political woes of the state. At the time, we encouraged investors to maintain their positions in California bonds and consider the rating downgrade to be an opportunity to add more California G.O.’s to their holdings.
Over the ensuing period, thousands of our investors took advantage of the enhanced yields created by the panic selling of those who bought into the media’s shortsighted approach to this situation.
They also deserve a pat on the back.