LOS ANGELES -- The Coalinga Public Financing Authority in California plans to meet tonight to consider sweetening the redemption Premium on a disputed bond call scheduled for Sept. 15.
Some dealers have challenged the redemption, saying it runs counter to their understanding of call provisions in documents governing the revenue bond issue.
Bank of America, the bond trustee, recently issued a notice of full redemption on the Coalinga authority's outstanding $11.1 million of 1991 Series A bonds.
The authority continues to believe it is acting within its legal rights, according to David Fitzgerald. a vice president at First California Capital Markets Group, the underwriter of the bonds.
Nevertheless, members of the city council also "highly value a constructive dialogue with the investor Community" and do not want to create "an unfavorable impression" in the market, Fitzgerald said.
As a sign of willingness to resolve the issue, Fitzgerald said the financing authority plans tonight to consider calling the bonds at 100% of the principal amount plus a 6% premium, rather than the 3% premium announced in the redemption notice.
Thomas Fus, Coalinga's finance director, said city officials hoped the sweetened premium "could work" in helping to appease dissatisfied dealers and bondholders. If the added premium fails to address concerns, "then what's the point?" Fus said.
One dealer observed that the premium boost could "take the sting off for many holders." But, he added, "it doesn't make me happy."
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.
The Coalinga authority's 1991 bond documents included a special redemption section. The documents said the debt could be subject to mandatory redemption if there are prepayments on the local obligations.
Dealers have questioned the use of this provision to make the mandatory call.
Depending on the language, some bond lawyers said such redemptions can be legal in certain instances because of the way such pooled transactions are structured.
For example, the underlying obligations in Marks-Roos deals can carry optional call provisions that permit a redemption at any time, the lawyers observed. As a result, holders of an authority's Marks-Roos bonds may discover that a call of the underlying debt can trigger a mandatory redemption of all the bonds in the event call protection is not imbedded in the underlying obligations.
The lawyers said they were not familiar with the specifics of the Coalinga transaction and declined to comment on it.
But they said thorny problems can arise when investors do not view bonds as though they are subject to a call at any time. The dissatisfied dealers say this factor fueled their unhappiness over the Coalinga authority's redemption plan.
The dealers said they were relying on a belief that the bonds were subject to optional redemption on or after Sept. 15, 2001, and they disagree with the notion that the special mandatory call provisions have been triggered.
Other market participants said issuers walk a fine line under such circumstances. Although an issuer may view its action as legal, it also must weigh the possibility that a hard stance could harm its standing with some investors.
In a brief interview Tuesday, Fitzgerald said the issuer was "in no way trying to pull a fast one" by redeeming the bonds. At this point, he said, the authority wants to "work together constructively" with dealers and bondholders to bring the matter to a close.
Bank of America, the bond trustee, also has been notified about the unhappiness of some dealers with the redemption.
A trust official at the bank said "counsel is looking at [the matter] right now." He declined further comment.