After 16 consecutive monthly failures, Tucson Electric Power Co.'s dutch auction process finally succeeded on Tuesday, driving down the utility's tax-exempt rate to 8.75%, from 12.6% in September.
Goldman, Sachs & Co. was the marketing agent on the deal until last Friday, when Tucson asked the firm to resign and replaced it with Bear, Stearns & Co.
Bear Stearns officials declined to comment other than to say, "We are very pleased with reaction from institutional investors to our marketing efforts."
Joseph S. Fichera, a managing director at Bear Stearns, added that the issue was oversubscribed.
David C. Clapp, a general partner with Goldman Sachs, said one reason the auction may have succeeded was the utility's announcement last month that it is actively considering converting the deal to a fixed rate and abandoning the auctions.
"We told them to convert a year ago," Mr. Clapp said. "If we could have told investors the deal was going to be fixed, every auction would have succeded because investors would have known they could get out of the deal."
The problem until now has been investors' liquidity concerns, according to numerous sources involved in the deal. Despite Tucson's much-publicized financial difficulties, including an attempt by some creditors to force the utility into bankruptcy, credit quality has not been a problem because the deal is insured by Financial Security Assurance and carries a triple-A rating.
But the string of failed auctions convinced many potential investors to shy away for fear of being stuck with a long-term bond, instead of an investment that could be sold every month.
The expectation that the deal is about to be converted gives skittish short-term investors enough comfort that they will be able to get out of the deal at that time, Mr. Clapp explained.
Tucson Electric has not announced any decision on whether or when it will convert the bonds, only that Bear Stearns has been hired to advise the utility on such a strategy. Tucson officials were not available for comment.
One market source knowledgeable about dutch auctions questioned whether expectations about a conversion would have any effect on liquidity. "Liquidity will only come from other investors, whether it's in the auctions or in the conversion," the source said. "That is a marketing issue."
Mr. Clapp said another development in recent weeks that may have helped Tuesday's auction was a statement from Tucson clarifying how rates would be set in the event of a failed auction.
In the dutch auction process, potential investors submit bids reflecting the yield they would be willing to accept to purchase the bonds. The lowest bid needed to clear the entire issue is determined, and every bidder at or below the given level receives that yield, regardless of their bid.
But in a failed auction there are not enough bids to cover the entire issue, so the auction fails and no one sells their bonds. The new monthly rate is pegged at a predetermined percentage of a special J.J. Kenny index.
In the Tucson deal, rates have gradually increased to last month's maximum 265% of the index, in accordance with the bond documents. But Mr. Clapp said the documents are vague in their explanation of how the rate is pegged, and that ambiguity created uncertainty in some investors; minds as to where rates should be after a failed auction.
Mr. Clapp noted that Tucson recently issued a statement saying it agrees with the interpretation that 265% of the Kenny index was the correct rate for a failed auction. That announcement eased concerns that had been voiced in previous auctions about where the rate should be set, Mr. Clapp said.
Bear Stearns declined to speculate on whether the possibility of a conversion to fixed-rate debt or the clarification of the monthly rate contributed to the auction's success.
