JP Morgan Provides California With $1.5 Billion Bridge Loan To Pay IOUs

August 19, 2009 11:40 a.m. EST

Sacramento, CA (AHN) - JP Morgan Chase & Co. agreed to supply California with a $1.5 billion interim loan that will be used to payoff IOUs before the state's new cash-flow borrowing program begins in early September.

Details of the loan were not disclosed, but reports have said JP Morgan offered a loan of up to $4 billion. The loan led Standard & Poor's to remove the states bonds from CreditWatch, an action that positively impacts $67.2 billion in California debt.

The JP Morgan loan is basically acting as a bridge until California begins selling revenue anticipation notes, a program slated to start in mid-September that has a target of $10.5 billion.

The state controller determined $10.5 billion is the amount that needs to be raised in order to cover cash flow needs for 2009-10, based on stress tests on projections from the state's Department of Finance.

"This plan is a crucial step toward restoring some fiscal order to California," said State Treasurer Bill Lockyer in a press release.

"Its successful implementation will rid us of the financial hardship and stigma caused by IOUs, and ensure the State has enough cash to provide crucial public services for the rest of the fiscal year," added Lockyer.

The State's investment board will meet August 21 to set September 4 as the date California will repay its IOUs and discontinue issuing them. Once that is complete, the State Treasurer's office will begin the program to sell $10.5 billion in revenue anticipation notes.

Those funds will be used to payback the JP Morgan loan and satisfy California's projected cash-flow needs through 2010.

The notes will be available through the state's Buy California Bonds program. Individual investors can purchase the notes through broker-dealers.