Will minibonds be a megahit?

California, the nation's largest issuer of municipal debt, will sell so-called minibonds for $25 to individual investors in addition to conventional $1,000 amounts, under a bill signed by Governor Jerry Brown. The lower-denomination bonds will attract a broader range of investors, lowering interest rates for the state, according to a legislative analysis. The report said many investors have fled the municipal market in the last six months. State Treasurer Bill Lockyer, who developed the minibond proposal, has no plans to sell the $25 bonds right away, spokesman Tom Dresslar said. California is scheduled to go to market Sept. 19 with a sale of as much as $2.6 billion in general-obligation bonds, he said. “We now have the flexibility to offer this product when it makes sense for taxpayers in any given transaction,” Dresslar said in a telephone interview yesterday. Lockyer, a 70-year-old Democrat, oversaw more than $27 billion in bond sales in 2010. The minibonds, regular zero- coupon and capital appreciation bonds, would be traded on the New York Stock Exchange. Lockyer developed the proposal after reviewing solicitations from Morgan Stanley (MS), Citigroup Inc. (C), Wells Fargo & Co. (WFC) and RBC Capital Markets in late 2009 and early 2010, according to documents from the treasurer's office. Banks collect fees on bond transactions and would stand to profit if California shifted a $1,000 bond sale into 40 sales of $25 each. Other Issuers A few other municipal issuers also have lowered denominations to reach the retail market, according to research by the Municipal Securities Rulemaking Board, the industry's regulator. Massachusetts sold $5 million of $490 million in debt in $1,000 increments, rather than the usual $5,000, in May. Minnesota sold bonds in $1,000 denominations in 2009 and 2010, according to the Star Tribune newspaper. Bergen County, New Jersey, sold bonds to individuals in denominations of $610 in December 2008 to finance improvements to its parks system, according to a county statement. --Bloomberg News--