The Treasury has dashed the U.S. Postal Service's hopes of striking out on its own in the capital markets, costing Wall Street underwriters a potential $2 billion-a-year customer.
Treasury officials outlined their position in congressional testimony yesterday, saying the service must continue to use the Federal Financing Bank as its execlusive borrowing source.
The movie thwarts postal officials' plans to use market discipline to enhance the service's financial management.
Postmaster General Anthony Frank unveiled the financing scheme to Wall Street bankers in May, calling the service "a major potential customer for the Street."
But Treasury Fiscal Assistant Secretary Gerald Murphy told a House government operations subcommittee yesterday that "The FFB is the only appropriate borrowing source" for the service.
"While borrowing in the market would appear to offer some market discipline for the Postal Service, Treasury believes that market participants would still look to the statutory line of credit and other ties the Postal Service would retain with the U.S. government and assume that an implied federal guarantee of such borrowings exists," Mr. Murphy said, referring to the service's $2 billion line of credit at the Treasury.
"Thus, the expected benefits of market discipline would not be achieved," he argued. The only way to achieve such discipline would be to sever all ties between the service and the federal government, a move that "is not realistic and is not being sought by either the Postal Service or the administration.
Comer S. Coppie, senior assistant postmaster general for finance, reiterated the service's belief that the "objective of independent financial management can best be realized by permitting the Post Service direct access to the financial markets instead of funneling its investments, borrowing, and disbursement banking through the U.S. Treasury."
'We know that it will be necessary to have the Treasury's concurrence before we can go to the outside financial markets," he said.
Stephen Kearny, Postal Service Treasurer, said postal officials remain hopeful that agreement can be reached.
"We didn't expect the Treasury to just change their minds over night," he said, adding that negotiations with Treasury officials will continue.
The original borrowing plan is part of a 43-point outline to overhaul the service's operations to help it keep pace with private competitors. Prepared by Lazard Freres & Co., the service's financial adviser, the report also recommends the Postal Service be allowed to conduct its banking and investment activities independent of the Treasury.
The Lazard report argues that while the Postal Service on its own might pay more for some financings than it would be going through the Federal Financing Bank, "the benefits of accessing the market include lower overall debt service costs due to the wide range of available financing options."
Like a regular agency borrower, the service would be able to vary the structure of its deals to market demand and target financings to different investors using the universe of maturity and call structures, Lazad said. Floating-rate debt, which is currently unavailable to the service through the Federal Financing Bank, generally provides a lower cost of funds than fixe-rate debt.
The postal Service's debt limit stands at $12.5 million and will rise to $15 billion in fiscal 1992. Its net annual borrowing for capital purposes is limited to $2 billion.
The Postal Service is not a stranger to the public credit market. In 1972, before the financing bank was created, the service sold a $250 million bond issue. Lazard said the service could return to the market "without legislative change" if the Treasury gave the green light.
Yesterday's Market
Mixing structured finance and bankruptcy law, Carter Hawley Hale Stores Inc. yesterday became the first bankrupt company to issue asset-backed notes.
Chemical Securities Inc., which priced the $200 million private transaction, did not release price information. The deal is expected to close Tuesday.
But the issue, essentially a structured debtor-in-possession financing, is expected to carry top-notch ratings despite the retailer's Chapter 11 filing, thanks to traditional structured finance techniques and the U.S. Bankruptcy Code.
The two-year securities, issued through a special purpose subsidiary, Camelback Funding Corp., are backed by Carter Hawley credit card accounts. The offering is part of a $563.5 million credit card securities program approved by the bankruptcy court on July 15. Carter will also be issuing about $363 million of asset-backed commercial paper.
The retailer expects to save as much as $7.5 million a year with the securitization program.
Troubled companies typically start lining up such so-called debtor in possession loans, which have a life of 12 to 18 months, just months or weeks before they file their bankruptcy petition. Once that filing has been heard by a court, an automatic stay is granted, freezing all previous debt. The company, which still controls its assets, becomes a "debtor in possesion," a new legal entity. Typically, all other debt becomes junior to the DIP facility.
"A traditional asset-backed structure combined with a court order can give triple-A financing for a bankrupt company,: said Barry Wood, assistant vice president at Standard & Poor's Corp. He said the underlying assets and credit enhancement from Capital Markets Assurance Corp. will drive the securities ratings, which will not be tied at all to Carter's D straight debt status.
The major agencies have not rated the issue yet.
"From the investors' point of view, they have a very strong structure and CapMac's guarantee," said one capital markets specialist.
