The Boston suburb of Chelsea, battered by past deficits and state receivership, took a tentative step yesterday toward putting its name back in the market for the first time since the 1970s.

A $ 100 million issue sold yesterday by the Chelsea Industrial Development Finance Agency is technically an obligation of the Commonwealth of Massachusetts. And Capital Guaranty Insurance Co. is insuring the deal, adding another buffer between the city and investors. Capital Guaranty's decision was based on the state's general obligation and lease-backed credit ratings. But city officials, who are hoping to market about $100 million of Chelsea bonds this winter for school renovations and a new courthouse, see yesterday's deal as a way of reacquainting the market with a local credit that once was one of Massachusetts' strongest.

Lehman Brothers served as senior underwriter for yesterday's issue, which will be used to build a 400,000-square-foot facility in Chelsea to house most of the Massachusetts Department of Revenue.

Chelsea was once a prosperous Boston suburb, but by the 1980s a growing poor Population and declining industrial base forced the city deep into debt. The last bonds Chelsea sold on its own matured in 1988.

At one point, Chelsea resorted to borrowing $5 million from the state to plug a budget gap. After the loan was granted, then-Gov. Michael Dukakis established a financial control board to monitor the city's finances.

In 1991, Gov. William F. Weld appointed businessman James Carlin to serve as receiver and act as the financial czar of the city. Since that time, $10 million of the city's $40 million budget has been cut and the receiver has negotiated leaner contracts with the city's police and fire unions.

In addition to its symbolic value for the revitalization efforts of the city, yesterday's issue also carried derivative products aimed at maximizing the deal's savings.

The transaction comprised Lehman's select auction variable-rate securities, or SAVRs, sold at par to yield 2.70%. The rate will be reset at auction every 35 days.

The SAVRs were sold in two series of $50 million each. Both series will also be auctioned every 35 days after their initial sale.

The SAVRs are insured by Capital Guaranty Insurance Co. and therefore the issue is triple-A rated. According to Barry Levine, a vice president at Capital Guaranty, this is the first municipal deal of its kind linked to a swap to be insured by the company.

To lock in a fixed rate after issuing the variable-rate SAVRs, the Massachusetts Industrial Finance Agency entered into a swap with Lehman Brothers for the life of the issue. Lehman will pay the floating rate on the SAVRs and the agency will pay Lehman a fixed rate of 5.48%.

The state facility will be owned by MIFA and the state will pay rent to the agency. The agency will then pay the city of Chelsea a fee for the land and provide debt service on the SAVRs.

"When we started to look at this transaction, the state's request was that we find the most cost-efficient way to sell the deal," said James B.G. Hearty, a senior vice president 'at Lehman Brothers. "By instituting the variable-rate structure and a swap, we saved between 25 and 30 basis points."

Lehman Brothers and MIFA are counterparties on the swap.

Hearty also said the state's overall interest costs dropped to 5.48% from about 5.75%.

Estimates on dollar savings from the structure vary. But Lehman Brothers estimated that adding the swap to the insured SAVR deal resulted in approximately $3 million in present value savings.

Lehman also estimated that if Chelsea had sold the issue without insurance, it would have cost the issuer an additional $9.3 million.

"The deal was pretty complicated. There are very few times a structure like this can be implemented," Hearty said. "But it looks to have paid off for everyone."

Initially, the property was to have been owned by a subsidiary of MIFA, called MIFA Property Inc.

"We decided against using that route because MIFA Property is a Chapter 180 charitable institution, but not a 501(c)(3) institution," said Daniel O'Connell, executive director of MIFA. "Using MIFA alone could save the state millions of dollars in potential sales taxes for equipment rental."

According to a trader at Lehman Brothers, the issue was broken into two $50 million series because it is easier for the firm's trading desk to sell $50 million of SAVRS at once than $100 million. Lehman Brothers is obligated to pay the entire auction rate.

Generally, the SAVRs are accompanied by another derivative security known as a residual interest bond, or RIB. The trader at Lehman said the swap between MIFA and Lehman Brothers removed the need for the RIB portion of the loan.

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