LOS ANGELES -- Los Angeles County plans next week to price $1.5 billion of tax and revenue anticipation notes with a maturity structure designed to counter a potential interest rate premium on such a massive offering.
As usual, the county still plans to sell fixed-rate notes that mature at the end of the new fiscal year beginning July 1.
This year, however, the county will feature a second tranche of so-called reset notes, meaning that the initial interest rate will be adjusted through a remarketing in January.
The county anticipates selling $1 billion of fixed-rate notes and $500 million of reset notes. The initial interest rate on the reset notes will accommodate a due date of Jan. 10, 1993, while the new rate that takes effect the following day will be effective through the final July 1, 1993, maturity date for the issue.
The reset notes are subject to a mandatory tender on Jan. 11 unless investors indicate beforehand they want to retain their holdings.
Underwriters expect that it probably will be "in the county's interest to offer two types of securities," said Anthony Taddey, a managing director of Morgan Stanley & Co., the senior manager on the deal.
The maturity structure should produce "a lower interest cost on both tranches" because it offsets pressure for a size premium to place such a large deal, he explained.
In a presentation this week for retail investors, Mr. Taddey said the maturity structure also allows the county "to play the shorter end" of the yield curve. He estimated, for example, that the reset notes could produce a yield of about 20 basis points less than the fixed-rate portion.
Based on recent market conditions, market participants expect the pricing on the reset notes to produce a yield of about 3%.
Underwriters also are pitching the reset notes to money market funds as a way to address recently enacted federal rules that force the funds to reduce the average life of their portfolios.
In keeping with the spirit of overall improved disclosure in the municipal marketplace, the county also is adding a new feature to its Tran program by committing to issue a supplemental disclosure document. The document, issued in conjunction with the interest rate reset and remarketing, will provide updated cash-flow information for investors.
Credit ratings for the new note issue continue to reflect the overall financial strength of Los Angeles County, which ranks as the largest county in the nation.
Moody's Investors Service rates the notes MIG-1 and Standard & Poor's Corp. rates them SP-1-plus. Fitch Investors Service, which was asked for the first time to rate the county's short-term debt, assigned its highest grade of F-1-plus.
The county secures the notes by impounding various unrestricted revenues in a repayment account at different points in the fiscal year, beginning in December.
Rating agency officials noted that this cash coverage undergirds the county's high rating, and that the county also has access to a huge pool of internal borrowable funds.
The county's ample cash resources enabled it to structure the reset notes without any external liquidity backup from a credit enhancer. Therefore, if the county cannot remarket the reset notes in January, it expects to redeem them with anticipated funds available in the note repayment account.
Although the county's financial operations remain sound, rating analysts also identified certain areas of concern. For example, Standard & Poor's this week affirmed its AA-minus rating on the county's general obligation debt, but revised its rating outlook to "negative" from "stable."
Standard & Poor's attributed the revised outlook to structural changes in the local economy, including anticipated job losses because of restructuring in the aerospace and banking industries. "These factors are compounded by the ongoing fiscal stress at the state level," which could lead to further cuts in local funding, the agency noted.
Indeed, counties and other localities fear they face severe cuts in anticipated revenue if the state follows through on sharp funding reductions to address its fiscal crisis.
On Wednesday, for example, state leaders said they would need spending cuts of as much as 15.5% to balance the budget without a tax increase. Such reductions in turn could affect many local programs, including those for schools and health services.
"We do have some concerns about the proposed [Los Angeles County] budget" because of uncertainty caused by the state's problems, Mark Campa, a vice president of Moody's, said yesterday.
But in the county's favor, he noted that "they've had some pretty tight situations" in the past and still managed to make necessary adjustments to maintain good financial balance.
Sandra Davis, the county's treasurer and tax collector, stressed this week during a meeting with retail investors and underwriters that "we'll adjust to whatever resources are available."
The county's proposed budget for fiscal 1993 currently totals about $11.3 billion for general purposes and $13.4 billion overall with other special districts and funds under the county's jurisdiction.
Ms. Davis noted that county officials have a track record for managing through good and bad times. She particularly emphasized the county's conservative budgeting approach, noting in particular that its revenue projections since early 1991 did not incorporate some of the optimism found in the state's expectations for an economic turnaround.
In connection with the note deal, scheduled for pricing Tuesday Ms. Davis said the county is seeking a sharp increase in participation by retail investors. this strategy will diversify the county's investor base and likely provide a benefit by leading to increased retail familiarity with the county when it markets long-term debt as well, Ms. Davis explained.
