LOS ANGELES -- A $30.2 million tax-exempt bond sale with unusual security -- backing by satellite wagering license fees in California -- is expected to come to market early this week.

An underwriting group led by PaineWebber Inc. will handle the deal for the California Fairs Financing Authority. Bond proceeds will refund the authority's $19.8 million of tax-exempt Cal-Fairs Revenue Bonds, series 1989A, and also prepay $11.3 million of taxable loans provided by Morgan Guaranty Trust Co.

The $19.8 million issue funded health and safety projects at fairgrounds across the state. The taxable loans financed construction of a satellite wagering facility, which receives satellite signals from live racing meets, at Del Mar, Calif.

The 1989 bond and loan deals established a track record for using the wagering fees as security, so this week's issue is "not as new as it might appear," noted Ashford Wood, a vice president of PaineWebber Inc.

Nevertheless, "we don't ordinarily see municipal bonds supported by a handle on horse racing," Mr. Wood added.

Indeed, this week's sale reflects a lengthy effort needed in part to ensure that bonds for satellite wagering facilities can be sold on a tax-exempt basis.

The Internal Revenue Service concluded in a recent private-letter ruling that the license fee on wagers at the facilities does not qualify as a private payment. As a result, the proceeds of the bonds fail the private security or payment test established under the Tax Reform Act of 1986 for private-activity bonds.

Private-activity bonds cannot be sold on a tax-exempt basis if the primary purpose of the proceeds is to finance gambling facilities, so officials at the fairs authority were pleased to have the IRS deem their financing a governmental bond.

Officials already were confident of the tax-exempt status for issues funding health and safety projects, but they were less certain of how the loans for the Del Mar Wagering facility would be treated.

Certain counties and agricultural associations formed the fairs financing authority in 1988 to provide financing for construction of satellite wagering facilities and health and safety projects at fairgrounds.

A 1985 state law permitted offtrack wagering at private track or fairground facilities. Revenues from the license fee on wagers are deposited in a satellite wagering account that secures the bonds.

The backing for this week's transaction, while unusual, provided enough comfort for Capital Guaranty Insurance Co. to insure the bonds. Based on that guarantee, Standard & Poor's Corp. rates the bonds AAA. No other rating agencies graded the bonds.

Michael Gallagher, a senior vice president of Capital Guaranty, said his company gained comfort from the deal's covenants and "very strong coverage."

It is estimated the debt service coverage radio will be about 4.3.

Mr. Gallagher said Capital Guaranty also drew assurance from the enabling law, in which the state Legislature promised not to alter the revenue pledge if it threatened to impair contracts relating to the bonds.

There have been recent legislative proposals to siphon off certain revenues going into the wagering account, a prospect that concerned Capital Guaranty.

But such proposals have been amended to "remove that risk to the bondholders," noted Norman Towne, director of horse racing and satellite wagering operations for the California Department of Food and Agriculture.

Mr. Towne predicted that legislation affecting satellite wagering will keep surfacing because of interest in expansion possibilities. "What's driving it is more money," he said, adding that his department favors ensuring that all license fees flow first into the account securing the bonds.

This week's bond issue is structured to include serials maturing from 1992 to 2001 and term bonds due in 2006 and 2011.

Mr. Wood said it is appropriate the satellite wagering license fee benefits county fairgrounds in California. Horse racing meets at county fairs have long been a key source of support for those events, Mr. Wood said, adding that the tie between the two is "as old as baseball, motherhood, and apple pie."

Satellite wagering at fairgrounds also has caught on fast. There are currently 21 permanent satellite wagering facilities at fairgrounds in the state. The total betting handle at those facilities jumped to $716.6 million in 1990 from $17.9 million in 1985, and the license fee revenues have grown to about $12 million annually from nothing five years ago. Those license fees secure the bonds.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.