WASHINGTON - New York City officials are upset that the city is being lumped in with Philadelphia and Bridgeport, Conn., in a New York Stock Exchange inquiry into securities firms' holdings of the bonds of troubled cities, a top city finance official said yesterday.
"With all due respect, we think our situation is very distinguishable from their's and we fail to understand the method by which these cities were selected," said the official, who asked not to be identified.
"Clearly in the case of Bridgeport and Philadelphia there are veyr significant credit concerns related to the potential for default as reflected by their ratings. But that's clearly not the case for New York," which is well within investment grade, he said. Moody's Investors Service rates the city's general obligation bonds Baal, and Standard & Poor's Corp. rates them A-minus.
Bridgeport and Philadelphia are rated CCC by Standard & Poor's. Moody's rates them B.
The New York City official also noted that other city officials were very upset about the action but have decided not to discuss it publicly to avoid bringing attention to the city's bonds.
The official's comments came in response to Tuesday's announcement that the Securities and Exchange change Commission has directed the New York Stock Exchange to examine whether member firms hold heavy concentrations of New York City or Philadelphia bonds.
The request for the inquiry was made public in an Aug. 12 letter from SEC Chairman Richard Breeden to Sen. Christopher Dodd, D-Conn. In the request, Mr. Breeden said New York and Philadelphia each recently were forced to issue short-term notes at high interest rates to meet immediate needs. He also pointed to Bridgeport's bankruptcy filing.
Sen. Dodd, who chairs the Senate Bank Committee's securities subcommittee, wrote to the SEC on May 23 expressing concern over the potential consequences of a default by New York, Philadelphia, or another major city on its bonds. An aide said Sen. Dodd is worried about current credit problems in the municipal market from a variety of standpoints, including whether a major default could make a serious dent in the capital position of any securities firm holding a heavy concentration of the troubled city's bonds.
The aide said such fears were fueled by last year's failure of Drexel Burnham Lambert Inc., which had heavy concentrations of corporate junk bonds.
A stock exchange spokesman yesterday said it has already completed the examination requested by the SEC, but won't make the results public.
"As a practical matter, we are not pleased" about being lumped in with Philadelphia, the New York official said. "We've had 11 years of balanced budgets. We have presented, on time, a balanced budget for fiscal year 1992. We have to operate under entirely different circumstances than does any major entity in this country.
"There has never been any informed questions about whether we are going to pay on our bonds. To be named in the same breath with Bridgeport and Philadelphia, one city that tried to declare bankruptcy and one [rated below investment grade] is confusing for investors," he said.
A number of dealers who underwrite or trade New York City bonds say they are not worried. They said the SEC's action has had no impact on the price of New York City bonds, noting that the latest issue was trading at 8.05% on the long end, down from yields of about 8.50% in March. Also, the city's bond syndicate had no problem selling $793 million of general obligation bonds last week, pricing the tax-exempt portion of the deal at a maximum yield of 8.10% -- its lowest yield in almost a year.
New York City recently issued $1 billion of tax anticipation notes, which received the highest short term tax-exempt rating bestowed by Standard & Poor's, Moddy's, and Fitch Investors Service. Philadelphia, on the other hand, struggled to sell approximately $117 million of unrated notes in a private placement.
Dealers contacted yesterday said they thought Sen. Dodd should not be overly concerned about inventories.
"I think they'll find there is not a huge amount of rick," said Stanley Ciemniecki, executive vice president of Lehman Brothers. "On any given day, NYSE member firms won't have a huge position, nothing outlandish. It's a nonevent." He added that the firm evaluates the credits of cities whose bonds they buy every day as it trades securities. "We're very comfortable with New York City."
"We turn them over quickly," said Francis McKenna, vice president of public finance for Roosevelt & Cross Inc., which deals in heavy concentrations of New York bonds and is not a member of the New York Stock Exchange.
"It sounds like somewhat of an overreaction to problems that certain credits are having." He said the firm's analysts recently issued a report on problems in the municipal market and said what is really raising eyebrows are not cities' credits, but some of the deals getting heavy publicity now that are backed by guaranteed investment contracts.
"It seems like a valid inquiry," said James Lebenthal, chairman of Lebenthal & Co., which also deals heavily in New York bonds and does not belong to the New York Stock Exchange. "But once having come up with the answer as to how many of these bonds are in the hands of the inventories of stock exchange members, what do you then do?"
Market participants say since the bond market fiasco and ensuing losses in the spring of 1987 -- which are partially responsible for driving Salomon Brothers Inc. and other municipal bond dealers out of the business -- most municipal bond dealers manage their bond inventories very conservatively, and look to sell new issues immediately rather than holding onto the bonds.
