LOS ANGELES -- Some California-based dealers are challenging a decision by the Coalinga Public Financing Authority to redeem a 1991 bond issue next month, arguing the call runs counter to the indenture governing the deal.

Bank of America, the trustee on the bonds, recently issued a notice of full redemption on the authority's $11.1 million 1991 series A bond issue.

But some dealers are up in arms about the notice, which calls for redemption on Sept. 15, 1993.

"A number of bondholders have expressed to me the belief that this is not a valid call," wrote Michael Sherman, executive vice president of Cal State Securities Corp., in a letter this week to the bond trustee.

Members of the financing team -- including the bond counsel -- recognize that some people are irritated, but said a legal rationale supported the call.

"I know people are unhappy," said Richard Hargrove of Jackson Hargrove Emerich Pedreira & Nahigian, the bond counsel. But Hargrove also noted that the definitions spelled out in the bond documents, including the 1991 official statement, can be used to support the redemption.

The disputed bonds are subject to optional redemption on and after Sept. 15, 200 1, according to the official statement for the 1991 issue.

In addition. the bonds are subject to special mandatory redemption under certain circumstances. That feature is being relied upon in the redemption notice, but some dealers are questioning whether circumstances justify use of the special provision.

The debt in question was issued under the state's Marks-Roos Local Bond Pooling Act, which allows joint powers agencies to issue revenue bonds. Bond proceeds can then be used to acquire underlying obligations of local agencies.

Under the special redemption section, the Coalinga authority's 1991 bond documents said the debt "shall be subject to mandatory redemption in part" if there are prepayments of local obligations.

Dealers, however, question using this provision to make the mandatory call next month.

"The funds are not being made available from partial prepayments," Sherman asserts in his letter.

Rather, Sherman and others argue that the funds for redemption were obtained from the authority's recent $12 million Series 1993 B refunding issue, dated June 17, 1993.

The dealers acknowledge that prepayments often occur with certain types of issues, such as assessment bonds. But they noted that such bonds do not provide the underlying security for the debt that has been called for full redemption.

Hargrove, however, said the bond documents provide a definition of prepayment that could apply to "any payment of principal and interest" on local obligations, not just certain types.

The 1991 official statement defines prepayment to mean "any payment of principal received with respect to a local obligation earlier than the time scheduled for payment."

Proceeds from the 1991 issue were used to obtain various local obligations for a water improvement project, a sewer improvement project, redevelopment purposes, a police station, and a low-to-moderate income housing guarantee fund.

The 1993 bond issue enabled Coalinga and its redevelopment agency to refinance the 1991 local obligations. That refunding "shall also result in the complete defeasance" of the authority's 1991 Series A bond issue on Sept. 15, 1993, according to the official statement for the 1993 bonds.

Some dealers said they believed this meant the 1991 bonds would be defeased to the first optional call date in 2001. In a defeasance, investments can be structured to provide for payment of debt service on the bonds to redemption or maturity.

A spokesman for a major bond house expressed sharp irritation yesterday over the redemption notice, arguing that he sees no justification for the way the bonds are being called.

Besides contacting the trustee, Sherman said he and others have discussed the matter with officials at First California Capital Markets Group, the underwriter of the bond issues.

David Fitzgerald, a vice president of First California, said his firm is seeking an independent opinion on the matter from the law firm of Orrick Herrington & Sutcliffe, which had no involvement in the bond issues.

A question being raised, Fitzgerald said, is whether a refunding of the local obligations then serves to set off a chain reaction" that permits the redemption of the pooled issue under the prepayment provisions.

Fitzgerald said he believes other issuers with Marks-Roos bonds outstanding also are viewing such trust indentures this way, rather than simply applying the prepayment provisions only to situations where assessment bonds or similar debt is involved.

Such indenture language is not uncommon in Marks-Roos financings, he said.

Although there has been talk about possible options in the Coalinga matter - including whether a way could be found to substitute collateral and defease the 1991 bonds until the first call date --

Fitzgerald stressed that any decision must pass legal muster. Fitzgerald also noted that lawyers have only been able to make a "cursory review" of the dealers' complaints at this point.

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