DALLAS - Oklahoma officials have approved an advance refunding of up to $750 million by the Grand River Dam Authority after setting conditions that include producing at least a 2% present-value savings.
Authority officials said the negotiated underwriting, which is their first transaction since a record $1.15 billion refunding in 1987, could yield as much as a 3% savings by the time it comes to market in October.
"As far as a target for present-value savings, if we can't do it with at least a 2% savings, we wouldn't want to do it," said Henry Neftzger, treasurer and chief financial officer of the Vanita, Okla., utility. "I think we'll get 3%."
The condition was set by the Legislative and Executive Bond Oversight commissions, which met separately in Oklahoma City and Tulsa on Monday to approve the deal. They also specified that issuance costs be capped at 1%, and that the bonds must be fixed-rate and not exceed the current final maturity of 2010. Also, the size of the issue cannot be greater than $750 million.
"As far as I'm concerned, [the conditions are] reasonable," Mr. Neftzger said.
The commissions have been privately criticized for setting savings targets in the past. Most notably, earlier this year an Oklahoma Turnpike Authority refunding was stalled for several months before the state gave its approval. The commissions stipulated at least a 2% present-value savings, a figure the deal almost doubled.
"There was some concern expressed about whether the commissions could do that," said Jim Joseph, the state's bond adviser. "But under the statutes, they have broad authority to set savings targets."
The commissions' approval of the Grand River Dam refunding marks the first time the authority has had to seek state approval for an issue. The commissions became operational in 1989, two years after the utility's last refunding.
In that deal, a $1.153 billion refunding was underwritten by a team headed by Smith Barney, Harris Upham & Co. and Merrill Lynch Capital Markets.
A new negotiated team for the proposed refunding has not been selected. Mr. Neftzger said a dozen firms have filed proposals to be senior managers, and another 12 have filed to be co-managers. He expects a decision between this Friday and Sept. 16.
Once a financing team is selected, the authority will monitor market conditions to determine if the sale will be completed.
Because the authority's $1.04 billion in outstanding debt has an average coupon of 6.99%, Mr. Neftzger said market conditions are not yet favorable for producing the $1 million a year in debt service savings he has targeted.
The outstanding debt is rated A by Moody's Investors Service and A-minus by Standard & Poor's Corp.
"Ideally, we'd like to see our long bond improve. It is probably somewhere around 6.3% right now and it needs to be around 5.8% or 5.9%," he said. "So we're 30 to 40 basis points away from where it needs to be."
Mr. Joseph said he recommended the 2% target because he doubts that long-term rates will fall.
"I think the chances are much greater that rates will go up than down," he said yesterday. "I think this is a good target. If we were in a normal market where long bonds were at 8%, we would be looking for 3 to 5% savings."
