ATLANTA -- Louisiana yesterday chose Smith Barney, Harris Upham & Co. and the First Boston Corp. to lead manage its upcoming $124.6 million general obligation refunding issue, the state's first GO bond sale since its upgrading last year and its first deal to include college savers bonds.
In a busy meeting, the State Bond Commission also gave preliminary approval yesterday to the Louisiana Public Facilities Authority's proposed plan to purchase general obligation ligation refunding bonds from various local governments, despite commissioners' concerns over the choice of the authority's bond counsel.
In addition, the commission designated Jones Muncipals Inc. as the state's financial adviser and approved New Orleans's plan to seek voter approval next month for a proposed $385 million GO sale.
The meeting "had a very full agenda, but we are particularly pleased that we can now get the GO refunding underway," said Rae Logan, the commission's director. "The baby has been born, now we have to raise it."
The commission tapped the Smith Barney/First Boston team over four other finalists chosen last week, Ms. Logan said, because the duo's refunding proposal called for the largest component of college savers bonds and the smallest amount of overall principal. Ms. Logan said New Orleans-based Howard, Weill, Labouisse, Friedrichs Inc. had been chosen as syndicate co-manager.
Under the Smith Barney/First Boston propsal, the state would sell $87.6 million of variable-rate debt and $37 million of zero coupon college savers bonds to refinance $128.3 million of debt remaining from the state's 1985D variable-rate bond issue -- for an estimated present value savings of about $6.8 million. The state has never before sold college savers debt.
Besides offering a vehicle for college savers bonds, Ms. Logan said, the deal would provide savings to the state by reducing interest costs and costs paid for a letter of credit. The commission's staff has estimated that the state can save about 30 basis points by replacing the current letter of credit, a standby purchase agreement with Citibank N.A. that is costing Louisiana an average of $913,000 per year.
Ms. Logan said the newly chosen senior managers proposed fees totaling about $1.26 million, including underwriters discount and remarketing fees.
Now that the underwriter has been chosen, Louisiana will file a lawsuit with the state circuit court in Baton Rouge to ensure the validity of the financing, Ms. Logan said. She said that the suit, which will name state taxpayers as the defendants, is needed to head off any challenge to the variable-rate deal on the grounds that it could cost more in interest expenses than the issue being refinanced. This would be a violation of state law.
Ms. Logan said the commission hopes sale of the bonds can take place by the end of September.
The commission gave conditional approval of the Louisiana Public Facilities Authority's refunding bond pool despite worries voiced at the meeting about a possible conflict of interest that might result from the authority's designation of New Orleans-based Foley & Judell as its bond counsel.
Foley is also issuer's counsel to many Lousiana localities that are likely to take advantage of the program -- leading some commission members to question what party the law firm would represent if a disagreement between the authority and its participants occurs.
There is a potential conflict, said Dennis Stine, Louisiana's commissioner of administration and a bond commission member, "The question has to be asked who Foley is representing in this transaction -- the [authority] as issuer or the participating local governments." The authority's managing director of administration and finance, Billy Gordon, said such concerns are groundless.
"The hiring of Foley gives us very competent counsel that is familiar with us and with the underlying credits," he said. "This is a very plain vanilla deal, and we just don't see any possibility for conflict as long as there is full disclosure."
Mr. Gordon pointed out that the guidelines of the National Association of Bond Lawyers allow such dual representation as long as there is proper disclosure. He also noted that the program would likely be more costly if another bond counsel is chosen. Foley has agreed to waive charging a fee to the authority and to only assess expenses.
Finally, he said that the bond commission already had approved in 1989 a similar refunding pool for localities -- the Community Loan Purchase Program -- in which Foley & Judell represented both the authority and participants. "If the commission had problems with this, then why didn't it raise the question two years ago?" he asked. "We didn't hear a peep."
The authority's underwriter for the program, Howard Weill, expects to kick off the program this summer with an offering of approximately $50 million.
According to Mr. Stine, the commission gave its preliminary approval to the program as long as participating governments are fully informed of Foley & Judell's role as issuer's counsel. He said that the commission also asked the authority to come back before the bond commission and certify that the local governments had been so informed.
The appointment of Jones Municipals Inc. as adviser to the state allows Cheryl Jones, the firm's founder, to continue providing financial advice to the state bond commission. Ms. Jones, who set up her firm this week, was previously with Discount Corp. of New York Municipals. Discount Corp. closed its doors this week after its parent, DCNY Corp., decided in April to get out of the municipal bond business.
Ms. Jones had headed Discount Corp.'s advisory contract with the state after the firm was named Louisiana's first financial adviser in October 1989.
The approval of the New Orleans general obligation bond refunding will allow that city to bring the proposed financing before voters on July 13. The plan would allow the cash-strapped city to pare annual debt service payments during the next few years, in exchange for an extending by 17 years the repayment period on the city's existing borrowings.
Last December, Standard & Poor's Corp. lifted Louisiana's rating on $2 billion of general obligation debt to A from BBB-plus, citing improvement in the state's cash flow and fiscal reforms recently approved by state voters.
Moody's Investors Service continues to rate the state's GOs Baal.
