ATLANTA -- Georgia is adding some spice to the competition for lead manager of its upcoming negotiated offering of $600 million general obligation refunding bonds: The winner will be one of the four finalists that bids the lowest on a competitive new-money GO issue that will precede the refunding.

Using this apparently unprecedented method, the state auditor said, Georgia hopes to give the firms added incentive to come in with the lowest possible bid for the competitive offering. Bidding on the offering is also open to other firms.

Claude Vickers, the state's auditor, said that the decision to go this route was in part influenced by the uproar over negotiated versus competitive underwriting in the market in the past couple weeks.

The lead manager for the negotiated financing, to be sold in late July, will be the lowest bidder on the new-money issue, Vickers said. The finalists, who were chosen Monday, are First Boston Corp., Goldman Sachs & Co., J.P. Morgan Securities Inc., and Dean Witter Reynolds Inc.

The top spot in the negotiated deal will be determined after those firms submit bids in a separate, competitive sale of between $300 million and $400 million of new-money state GOs in the second half of June, Vickers said.

"The state decided to go this route because with these two financings ahead of it, there was a clear opportunity to create Some real competition -- and savings -- on the first one." Vickers said. "Also, because of all the recent news stories [about negotiated financings], there was a pretty strong debate over whether to go negotiated at all for the refunding. This was the way we felt we could show that we were clearly basing our choice of senior manager on an objective measure."

Vickers said the decision on underwriter selection was reached by a four-member finance subcommittee of the Georgia State Financing and Investment Commission, of which he is a member. He said he expects the full commission, whose approval is necessary before the bond issue is sold, to endorse the subcommittee's decision at its next scheduled meeting on May 25.

Vickers said that subcommittee's action was prompted in part by the investigation in New Jersey over underwriting practices. That probe prompted Gov. Jim Florio to bar the sale of virtually all negotiated debt by the state and its authorities.

Municipal market participants said yesterday that while it is common for issuers to weigh past participation in competitive offerings when choosing lead managers for a negotiated deal, they knew of no instance in which that connection had been made the linchpin of the final selection process.

"This method [to select underwriters in negotiated issues] has been used informally in other circumstances," said Chester Johnson, chairman of Government Finance Associates, "but to my knowledge this is the first time it has been codified in this way."

Johnson said that issuers that consider using this approach should be very careful to monitor the follow-up negotiated sale to make sure that its pricing is not skewed to make up for possible underwriting losses on the competitive sale.

"This puts the underwriters in a tough spot, but I think it shows some pretty creative thinking on the part of the issuer," said Robert Morrison, a managing consultant for Government Funding Advisory Associates, an Atlanta-based financial advisory firm. "You can bet you will see some real competition on the deal."

A number of market participants expressed strong reservations about the idea.

"This is hardly a true test of underwriter commitment to an issuer because these guys [the finalists] are going to fall all over themselves to get the deal," said the head of an underwriting desk in New York City, who declined to be identified. "If you wanted to be really objective, you would set up some kind of mathematical formula to weigh exactly who has given the best bids on most competitive deals over, say, a five-year period."

Another syndicate manager, who also asked that he not be named, said that investment banks not included among the four finalists for the negotiated deal would have little incentive to head up groups bidding for the competitive sale.

"Of course, the four finalists will come roaring out of the starting gate for the competitive deal," he said, "but I would be very surprised if others take the trouble to get together a group."

Vickers said the state would take special care in monitoring the negotiated sale when it is sold. He also insisted that each of the four finalists would make an excellent lead manager for the negotiated deal.

Vickers also said that he expected other bidders besides the four, given the market interest in the offering.

He said that the four finalists were chosen from 23 applicants on the basis of experience in similar transactions, distribution capacity, capital, and ability to set up an underwriting team.

The second-place bidder among the four finalists would be designated co-senior manager of the negotiated offering. The other two investment banks, Vickers said, would be included in the deal as co-managers.

Vickers said that the size of the competitive issue will be determined by the end of this week and will probably take place in the third week in June, allowing the deal to close just after July 1, the beginning of Georgia's 1994 fiscal year.

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