Thomas Kenny is director of municipal research at Franklin Group of Funds in San Mateo, Calif., and was elected to the first team of All-American Analysts in the special district, special assessment, and Mello-Roos category.

David Hitchcock of Standard & Poor's Corp. posted a solid performance in the sector and helped S&P win top overall honors in the team rankings.

Mr. Kenny joined Franklin in July 1986 after graduating from the University of California at Santa Barbara, where he studied finance and accounting. He continues to pursue his master of science degree in finance at Golden Gate University.

Since Mr. Kenny joined Franklin, the municipal research area has grown from two professionals to a staff of 17 full-time analysts. "As assets have grown at Franklin, Andrew Johnson and Gregory Herrington have recognized the need to grow a research department."

Currently Mr. Kenny is vice chairman and incoming chairman of the California Society of Municipal Analysts. Additionally, Mr. Kenny has served several years on the board of governors of the National Federation of Municipal Analysts and was elected vice chairman of the federation for 1993.

Moreover, Mr. Kenny was appointed to the California Debt Advisory Commission's technical advisory committee. The appointment, by California State Treasurer Kathleen Brown, represents the first time a representative from the investment community has been appointed to the influential committee.

Transactionally Oriented Research

Franklin has built the research department from within the organization's management training program, with approximately 50 college graduates enrolling each year.

"We're proud of the fact that we are very transactionally oriented research people," Mr. Kenny explained. "We don't publish six-page, glossy reports on macroeconomic trends, though I'm sure our marketing department would love us to do it, because our focus is on transactions in the primary market."

Over 90% of Franklin's purchase for its funds are made in the primary markets. As a result, the research not only reviews credits but also structures issues to meet the company's needs.

"The value of having a large staff of analysts means we have young people calling up chief financial officers at hospitals or city and state treasurers to get the latest and best financial information," Mr. Kenny said.

Additionally, Franklin's location in California gives the research department a "huge advantage because we can kick the dirt to see for ourselves how the many California credits are performing."

Mr. Kenny explained: "Some credits are more volatile than others and through our surveillance we're calculating trends, both positive and negative, well before the rating agencies. In fact, based on our independent analysis, we often don't agree with rating agencies but that's what makes a market."

If a firm has only three analysts, those people should focus on the lower-quality credits in their jobs, Mr. Kenny acknowledges. But the real task of municipal research departments is to focus on all credits to determine if they are overvalued as well as undervalued. "You'll hear spirited discussions in our offices about credits and analysis based on independent research," he said.

Mr. Kenny stressed that All-American analysis is being conducted in California, Chicago, Boston, and many cities across the Hudson and Harlem rivers: "We put that perspective to work in our portfolios."

Mello-Roos Market

Mr. Kenny has championed finding value in Mello-Roos financings over the past year. He acknowledges considerable problems in determining the quality of a Mello-Roos transaction because many are unrated.

Negative press coverage about the bonds, likening the securities to those issued by Colorado Special Districts or Texas MUDs, "spooked a lot of buyers," Mr. Kenny said.

"A great time to be in a market is when no one else is buying," he added, "if you can do the homework."

For example, a $16 million transaction in Southern California for a Mello-Roos district that had been shopped around for a long time was finally presented to Franklin by an underwriter willing to work on the structure.

The land for the district was owned by a company that was having some problems, but the company was owned by a strong, single-A rated parent company.

"We were able to get significant cash up front from the parent company to cover tax payments," Mr. Kenny explained. "Additionally we had a guarantee from the parent company that was attached so it would ~burn off' for a minimum period of eight years. Moreover, the entire transaction was subject to very stringent debt service coverage requirements and diversification of ownership requirements."

As a result, Franklin's funds were able to purchase the bonds with a yield of 8.35% and an underlying credit quality approximating a single-A rating.

Such expertise has resulted in investors "piggy backing" on Franklin's research, Mr. Kenny noted. "Even though we were not the lead buyer in a transaction, issuers have been told that buyers will take the balance of the deal subject to Franklin approval."

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