Despite a poor response to its offer to purchase bonds of the Government Development Bank for Puerto Rico last week, Cargill Financial Services Corp. may still emerge as the big winner in the transaction.

As part of a tender that expired Aug. 5, investors agreed to sell only $37 million of a possible $450 million of bonds from the government development bank issue, which was sold in 1983.

Investors' reluctance to tender their bonds to Cargill pointed up their belief that the financial services company would be the only one to benefit from the transaction, some municipal dealers and portfolio managers said.

But since Cargill holds the rights to purchase 12% Treasury coupon securities that were issued to back the government development bank bonds, ti could still reap huge gains when those securities mature.

In fact, when the government development bank in 1989 relinquished its claims on the Treasury securities that serve as the underlying security for the bonds, the bank may have given up a stake in sizable returns from the bond deal.

"They took a position on interest rates; if they wouldn't have taken this bet on interest rates, they would have been better off," said one longtime municipal market participant.

In 1989, the average yield on The Bond Buyer's 20-bond index of general obligation bond yields was 7.23%, compared with 9.51% in 1983 when the government development bank issued its 10% coupon bonds. Bank officials were betting that bond prices would remain at current levels or move slightly higher, while yields declined modestly so that the value of the Treasury Investment Growth Receipts, the bonds' underlying security, would remain stable or decline slightly.

Officials at the government development bank declined to comment on the bond deal or the tender offer, said Marilyn Rivera, a spokeswoman for the bank.

A participant in the tender offer said, "The word on the Street is they got beat and that's why they won't talk about it."

Cargill's tender for the government development bank's bonds may have been the first third-party tender to be executed in the municipal market, according to several market sources.

In addition, when the bond issue was sold in 1983, it also was a hallmark in the tax-exempt market due to its unusual structure.

The government development bank bonds were sold as 10% coupon securities priced at par. The 30-year bonds have a final maturity of Aug. 15, 2013.

The deal was the first to be backed by TIGRs, the zero coupon securities created by Merrill Lynch & Co. The TIGRs used in the deal have a 12% coupon and a final maturity in 2013, and interest on the government development bank bonds is secured by a letter of credit until February 1994. After that, beginning in August 1994, interest and principal are secured by the TIGRs.

Strong gains have been posted on the TIGRs since they were issued in December 1983. Their market value on June 30, 1084, was approximately $101.8 million, according to the government development bank's 1984 annual report. The market value increased to $353.19 million by June 30, 1989, according to that year's annual report.

The bank also saw its carrying value on the TIGRs increase by $104.92 million, to $245.45 million as of June 30, 1989, from $140.54 million as of June 30, 1984, according to annual reports for those years.

Despite the large gains posted on the TIGRs, the bank considered its bonds a costly investment. Annual debt service on the 10% general obligation bonds totaled $45 million in interest payments.

In comparison, the annual debt service payments on Puerto Rico's recent $310 million general obligation bond offering range from $16.28 million in 1993 to $23.28 million in 2022. The Puerto Rico GOs carry a top yield of 6.05%.

In 1989, the government development bank sold an option to purchase the TIGRs to First Boston Corp. for $11.228 million, according to the bank's 1989 annual report. In addition, as optionee, First Boston had the right to cause the bonds to be called, in whole or part, before maturity. But the government development bank could not redeem its 10% bonds without the consent of First Boston.

"The cost of those [bonds] was very expensive for the bank," said Jose Cantero, a former president of the bank.

As a result, the bank expected to call the bonds in 1994. But to do that, it would have to pay out about $468 million and then, depending on interest rates, hope it would get paid back by the TIGRs.

"At that point, the bank was sure that we would call the bonds in 1994," said Mr. Cantero. "That was very expensive money and we were looking for a way to minimize the expense to the bank.

"The bank is a very conservative institution. It seemed it was a good decision at the time," he said of the move to sell the option on the TIGRs.

The bank sold the option as a means of "locking in their gains on the TIGRs," said Philip W. Clark, a partner of Brown & Wood, bond counsel to the government development bank. "At the time they sold them, the TIGRs were worth a lot more because interest rates went down,"

The bank decided to sell the option because it did not know what interest rates would be in 1994 and whether the TIGRs would be worth the $468 million it would cost to pay off the bonds.

"At the time the bank was offered this deal" by First Boston and thought "it might be well to take your winnings and go home," a source familiar with the transaction said.

Later that year, Merrill Lynch purchased the option from First Boston, and last June Cargill Financial Services Corp., a subsidiary of Cargill Inc., purchased the right to buy the TIGRs from Merrill. The purchase also gives Cargill control over when to redeem the government development bank bonds.

The poor response Cargill received to its tender offer heightens the possibility that Cargill will exercise its option and call the bonds at the first possible redemption date, Feb. 15, 1994. On that date, the government development bank bonds would be callable at a price of 104.

Under terms of the option agreement, it the government development bank bonds are called on that date, the purchaser of the TIGRs, now Cargill, would turn over approximately $468 million to the trustee, Bank of America Trust Co. of New York, to pay off the bonds. That amount would include $450 million, or the principal amount of the bonds, plus the redemption premium of 4%, or $18 million.

After the bonds are called, Cargill would still receive payments on the TIGRs, unless they are sold, until at least 2008. The TIGRs are callable that year by the U.S. Treasury.

With most market strategists calling for rates to be lower than when the TIGRs were issued in 1983, Cargill or any holder of the TIGRs is expected to see a windfall.

"Anyone who has been a holder of the TIGRs has been the smartest guy in town," one market participant said. "In reality, [the government development bank] gave up all of its rights. They could have sold the TIGRs all themselves and made a lot more money and then called the bonds."

If Cargill calls the government development bank bonds in 1994, it will be betting that future gains on the TIGRs would allow it to recoup whatever it paid for the option as well as the $468 million needed to redeem the bonds.

When the government development bank sold the bonds in 1983, it was expected to profit because the deal offered a combination of new money and arbitrage income.

The bond issue was the last offering in which a U.S. possession could issue arbitrage bonds. After the deal closed, the federal government enacted a law to bring U.S. possessions and territories in compliance with existing tax codes prohibiting municipalities from receiving excessive arbitrage differential, which in most cases was set at 1.5%.

In an arbitrage bond issue, the issuer sells tax-exempt bonds and invests some of the proceeds in higher-yielding Treasury or corporate securities. The Treasury or corporate bonds are then used to pay interest and principal on the tax-exempt issue, leaving the issuer with arbitrage profit.

Proceeds from the bank's offering were $440 million; about $263 million was made available to the bank for corporate purposes after the purchase of the TIGRs and a $45 million deposit to the bonds' interest reserve account. The bank was to receive the balance on the $440 million, or about $177 million, plus interest, after the release of the interest reserve account and the semiannual maturities of the TIGRs, according to the official statement for the bond deal.

"It's very unusual. Generally it's [now] prohibited by the tax law," said Mr. Clark of Brown & Wood. Essentially, the bank was to make 18 semiannual interest payments on the bonds, with two additional payments covered by moneys in the reserve fund. The remainder of principal and interest payments would be covered by the TIGRs.

The bank is the fiscal agent for the Puerto Rican commonwealth, its municipalities, and public corporations.

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