CHICAGO -- Columbus, Ohio, will provide its own liquidity support for $51.6 million of adjustable-rate sewerage system revenue refunding bonds scheduled to go to market tomorrow.

The deal marks the first time a local government will do without a letter of credit on a rated variable-rate issue and use its own investment portfolio to provide liquidity. By doing so, the city will save almost $3 million.

Columbus is also the first local government issued a liquidity support rating by Standard & Poor's Corp. and Moody's Investors Service, the ratings agencies said. Previously, the agencies issued such ratings only to universities and hospitals. States, such as Texas, have also provided liquidity agreements on deals.

Standard & Poor's assigned an A-1-plus rating to Columbus' liquidity support, while Moody's rated it VMIG-1. The bonds were upgraded to AA-minus from A-plus by Standard & Poor's and rated A1 by Moody's.

Brad Sprague, a vice president at A.G. Edwards & Sons Inc., the sole underwriter for the issue, said the city has "stable" investment practices and a liquid portfolio that could cover a draw caused by a remarketing.

"I think what the city was able to demonstrate to the rating agencies was that its investment portfolio is large enough and is consistently balanced so it doesn't fluctuate up and down," Sprague said.

Standard & Poor's found the city's average investment portfolio to be "substantial." In an article in this week's edition of CreditWeek Municipal, the agency said that annual average weekly balances ranged from a low of $296 million in 1988 and 1990 to a high of $374 million last year.

The city's lowest daily balances during each month since 1991 show a low of $255 million in October 1992 and a high of $410 million in May 1993.

Jeanne Wilson, an assistant vice president at Moody's, said the agency plans to monitor Columbus' investment portfolio quarterly to make sure there is sufficient cash on hand and to determine if there has been any change in investment policy that could alter the city's cash position.

Hugh Dorrian, Columbus' auditor, said the city sets its own investment policies, which call for investing in U.S. government bonds, notes, and bills, as well as Fannie Maes, Sallie Maes, and Freddie Macs. In addition, the city invests money with STAR Ohio, the fund run by the Ohio treasurer's office.

Michelle Kelly-Underwood, executive assistant to the auditor, said Columbus is able to maintain consistent deposits in its portfolio because the city relies more on revenues from its 2% income tax than on annual or twice-a-year property tax payments.

Dorrian said Columbus began working on the deal two years ago. By using its own liquidity support, the city will save $2.74 million over the 17-year life of the issue, he said. The support will replace an irrevocable direct-pay letter of credit from Sanwa Bank Ltd., which is securing the bonds that will be refunded.

The refunding will also allow the city to eliminate a $19.8 million debt service reserve fund, according to Sprague. He said $12 million of the funds will be used to defease some outstanding fixed-rate revenue bonds that mature in 1995 and 1996. The remainder will be placed in the sewer system's construction fund.

Kimberly Turner, vice president at BT Securities Corp., the remarketing agent for the issue, said the bonds should be well-received by the market, because mutual funds are on the lookout for a typical credit supporters.

"We think the appetite will be very strong because portfolios are always looking for new and good credits," she said.

Turner said that mutual fund companies have placed ceilings on the amount of debt they hold that is secured by any single bank. In addition, the Securities and Exchange Commission has proposed a rule that would impose further limits on the funds.

"So if the funds now bought the city of Columbus, they could buy more paper of somebody else's," she said.

Columbus has a good reputation, Turner said, and the market has accepted variable-rate debt with liquidity support from hospitals and universities in place of a letter of credit.

Not a lot of other local governments are expected to follow in Columbus' footsteps. Diane Brosen, a director at Standard & Poor's, said that most local governments lack the liquidity that Columbus was able to demonstrate.

"Only highly rated, very liquid local governments will be potential candidates for providing the required liquidity support for variable-rate deals," Brosen said.

In 1983, Columbus was the first municipality to issue variable-rate debt, Dorrian said.

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