ATLANTA -- As Louisiana's superheated gubernatorial runoff between Edwin Edwards and David Duke draws to a close, many municipal market participants warn that the state's bonds could drop in value whichever candidate prevails.
If Mr. Duke wins tomorrow, many in the municipal industry now say a sell-off could begin within days as bondholders recoil at the idea of a former Ku Klux Klan grand wizard running a government. Yields on the Louisiana uninsured general obligation debt could soar by as much as 50 basis points, they say.
But victory for Mr. Edwards -- which voters say is growing more likely -- might subject the state's debt to slower but equally devastating devaluation, many of these same investment bankers, portfolio managers, and analysts warn.
This, they say, could happen if Louisiana again begins to languish under the former three-term governor, who has been widely blamed for bringing the state to the edge of insolvency in the late 1980s.
"As I see it, the election of Duke would cause a very dramatic short-term reaction, with people quickly getting out [of Louisiana bonds] because of the stink factor," said Robert Froehlich, vice president of municipal research at Van Kampen Merrit Investment Advisory Corp.
"But in the longer term, an Edwards victory could be just as negative for this market if questions persist about his leadership," he said.
Roemer's Shadow
William Oliver, a vice president at Prudential Capital Management, put the issue somewhat differently.
"Since Gove. [Buddy] Roemer was eliminated in the gubernatorial primary, the market has been trying not to really focus on the unpleasant choice between an Edwards and a Duke," he said. "After the runoff, it will have to face the reality that one of them is governor, and that may not be a pretty sight." Both candidates will be judged in the shadow of the incumbent governor, who was rejected by the voters Oct. 19 but enjoys heroic status with the bond market, according to Peter Shapiro, a vice president at Citicorp Securities Markets.
Mr. Roemer was the main reason Louisiana debt traded sharply higher in value between 1987 and 1991, Mr. Shapiro argued.
"The market was really very pleased with Buddy Roemer, who it saw as a man who brought the state back from the credit deterioration it had suffered under Edwards," Mr. Shapiro said. He noted that the improvement in Louisiana's standing had been institutionalized last December in the upgrade by Standard & Poor's Corp. to A from Baal.
"But now the man that created that context for improvement no longer has the opportunity to continue as governor," said Mr. Shapiro. "So there can't not be a concern on the part of the market, and there is also necessarily some downward pressure on the value of state debt."
In assessing the effect on debt of a Duke administration, market participants are focusing on at least three areas of potential trouble: lessened marketability of new issues, a sell-off of existing debt, and a general diminishment of credit quality caused by economic distress.
"Any new bond issue in which a Gov. Duke would be intimately involved -- and that incudes general obligation deals as the most obvious example -- may well face a thinner market as certain institutions decide not to participate," said Ronald Blake, senior portfolio manager at the Franklin Group. "Those institutions might be minority-owned investment firms, or those with managers who have been offended by Duke's past statements."
Rodney Ellis, chairman of Apex Securities, a minority-owned investment banking firm, said black bankers are apt to be particularly wary of working with an administration headed by a man who has spent years as a white supremacist.
"If David Duke were elected governor, I feel I wouldn't be welcome to do business in the state of Louisina, so I just wouldn't even try to do business there," he said.
Similarly, Citicorp's Mr. Shapiro suggested that Jews might be reluctant to become involved in bond deals connected with a state government whose leader has openly associated with American Nazi groups.
"I can't speak for my firm, but speaking for myself as a Jewish investment banker, I would feel very uncomfortable dealing with a Duke administration, and I suspect many others might feel the same way," he said.
Institutions that are longtime holders of Louisiana debt may well feel pressure to sell off those assets, Mr. Oliver said. "Insurance companies and banks invest for their own portfolios, and if a member of the board makes a big point about Louisiana bonds, they may divest them."
Finally, market participants say, election of the former klansman could rock the state's already fragile economy.
For the municipal industry, this problem is twofold.
First, Louisiana faces yet another budget crisis, with officials now estimating that fiscal 1993 revenues could lag a continuation of spending levels by about $1 million. What would a Duke government do to restore balance?
"Duke is a cipher as far as the market is concerned because no one can really guess what his fiscal policy is," Mr. Shapiro said. "He has tried to turn this vagueness into an asset, because it leaves him off the hook in terms of how, specifically, he would solve the state's budgetary problems. But that same vagueness could become a very large liability when the Legislature gets down to business next year."
Second, there is business's reaction. According to Tim Ryan, an economist at the University of New Orleans, the state would suffer a total of $1.8 billion in foregone business if Mr. Duke is elected, $600 million in lost convention bookings, and $1.2 billion from what he terms "the chilling effect on investment in general."
"Given the delicate state of our economic recovery, I think the effect of a Duke governship would be devastating," Mr. Ryan said, "particularly on the New Orleans area, which counts on sports and convention business."
Mr. Edwards clearly does not provoke the fear and uncertainty that many in the municipal market feel for Mr. Duke. But the former governor's very familiarity to both the people of Louisiana and Wall Street poses a peculiarly heavy burden for the Democratic ex-governor.
"With Duke, there is so little information on his quality as a leader that it's difficult to draw too many conclusions one way or the other," Mr. Froehlich said. "For Edwards, unfortunately, there is a record that is all too clear: Here is a guy that almost ran the state into the ground. This man has a lot of proving to do, and I expect the market to in some ways hold him more strictly accountable than Duke."
For many market participants, Mr. Edwards's record during his final term, which lasted from 1984 to 1988, is particularly disquieting. In 1987, the stte faced a cash-flow shortfall of $940 million and a projected yearend deficit of $730 million. In addition, during that third term, Mr. Edwards stood trial twice on federal corruption charges alleging he brokered backroom deals for hospital permits.
"The municipal market sees Gov. Roemer as having tried to clean up the mess created by Mr. Edwards," Mr. Oliver said. "It will want him right away to continue building on the [Roemer] reforms of the state's budgetary process and tax structure.
A spokesman for Mr. Edwards declined to comment specifically on the concerns of municipal market participants, but he did point out that the ex-governor has offered a detailed blueprint of how he would deal with the state's fiscal crisis. That response, the spokesman said, focused on a continued suspension of exemptions from sales taxes and a call for a constitutional convention on tax reform.
Representative of the Duke campaign were not available for comment, but in numerous recent statements Mr. Duke vigorously rejected the claim that his election would cause a net loss of business. Mr. Duke also has said repeatedly that he regrets his association with the Ku Klux Klan and his past racist and anti-semitic remarks.
Market Tests
As the market awaits the results of tomorrow's elections, it can look forward to some clear litmus tests beyond its possible trial by fire in the next several weeks.
The next debt issue planned by the state is a $130 million general obligation refunding issue, which includes college saves bonds and is scheduled for sale sometime next month, according to Dennis Stine, Gov. Roemer's commissioner of finance and administration. Mr. Stine said state officals are also currently planning for a sale of more than $100 million of newmoney general obligation bonds sometime early next year.
Mr. Stine said he and state Treasurer Mary Landrieu plan to meet with ratings agency officials next Tuesday and Wednesday to discuss the upcoming sales in light of the election results. The state official added that he is confident that the reforms pushed by Gov. Roemer that resulted in constitutional changes in the state fiscal and budgetary processes last year will help insulate the state from the missteps of any one governor.
For their part, rating agency officials continue to take a wait-and-see attitude. Jay Abrams, a vice president at Standard & Poor's Corp., said the agency will closely examine any credit implications if the state loses business or if the legislative process is paralyzed.
"If the election has a signifant impact on business climate or economy in Louisiana, it would be taken into consideration in our rating, but we would do a step-by-step analysis focusing on actual job loss. It must be demonstrated to us that the real disruption is occuring," he said. "Similarly we would look very systematically at any legislative problems."
Louisiana's $2.2 billion of outstanding general obligation debt is rated A by Standard & Poor's Corp. and Baal by Moody's Investors Service.
As market participants await the election results, traders reported yesterday that the market for Louisiana state bonds has been unusually quiet since the Oct. 19 open primary eliminated Gov. Roemer from contention.
One municipal trader also said recent polls showing a slight trend toward Mr. Edwards have lessened anxiety about the possibility of a Duke victory. According to one poll released Wednesday by the University of New Orleans, 52% of respondents said they would vote for Mr. Edwards, while 26% favored Mr. Duke and 22% were undecided.
Not suprisingly, some municipal bond deales are poised to take advantage of any opportunities that arise.
A rise in yields on Louisiana bonds following a Duke victory could actually present a buying opportunity, said Bernard B. Beal, chief executive officer of M.R. Beal & Co. Buyers could bet on a market stabilization following panic selling, he suggested.
Another strategy, one trader said, might be to count on a wave of relief if Mr. Edwards wins. Investors could buy Louisiana bonds now and then sell immediately after his election.
