WASHINGTON -- Harrisburg, Pa., has redeemed about $390.1 million of electric revenue bonds for a profit of more than $8 million despite the concerns of some traders, lawyers, and federal regulators that the redemption might violate bondholder rights and tax laws.

The bonds were issued in 1986 to finance a new dam and hydroelectric generating plant to the Susquehana River. But the project has not been built and is currently opposed by federal and state agencies, as well as sports and environmental groups.

The bonds were redeemed through a current refunding that took place last week. The debt service on the bonds was actually paid on Monday, the first business day after May 15, the date for which the redemption had been scheduled, according to a participant in the transaction who asked not to be identified.

The refunding occurred last Thursday when The Harrisburg Authority, an arm of the city, issued and privately placed about $390.1 million of tax-exempt refunding bond anticipation notes with the Pittsburgh National Corp. The city netted more than $8 million from the redemption because in the current market the escrow was worth more than the bonds, the participant said.

Several traders and lawyers have complained the city was making money from the redemption at the expense of bondholders. They also warned that the redemption might violate provisions in the bond documents that prohibited the escrow from being used to redeem the bonds.

Participants in the transaction contend, however, that the redemption did not violate any rights or laws because the bond documents said the bonds could be redeemed at any interest payment date, including May 15, with only a 15-day notification period. They said the escrowed securities would not be used to redeem the bonds, but would be used to provide security for the refunding notes. Once the bonds were defeased and cash was on hand to assure the debt service would be paid, the lien on the escrow was released along with any restrictions on the use of the escrowed securities, they said.

But the traders and lawyers argued that using the escrow to provide security for the refunding notes was tantamount to using it to redeem the bonds since the refunding notes could not have been issued otherwise.

They said the unusually short 15-day notification period for the redemption led one information service to fail to disclose that the bonds could be called on May 15. Officials with Kenny S&P Information Services confirmed last week that, because they did not receive a 30-day notice of redemption on the 1986 bonds, they assumed and reported on their KENNYBASE system that the bonds were not callable until the next interest payment date, Nov. 15, 1993. Kenny did not receive the issuer's notice of redemption until May 4, after which it changed the call information, the officials said.

Federal regulators have said that the Harrisburg bonds raised major tax law issues because the city reaped millions of dollars in arbitrage profits by investing the bond proceeds on an unrestricted basis for seven years even though no project had ever been built. An adviser to the city said the city had earned more than $20 million in arbitrage. And a lawyer said the proceeds were invested on an unrestricted basis.

Under the tax law, issuers are supposed to spend 85% of their bond proceeds on a project during a three-year or five-year temporary period during which the bond proceeds can be invested without restriction. But issuers are expected to yield-restrict their investments afterward if the project remains unbuilt.

Federal regulatory officials have said that if the project never was feasible, as some observers contend, the bonds could be taxable arbitrage bonds.

One federal official said yesterday that he could not comment on whether the IRS would investigate the transaction.

A trader, who complained the redemption was unfair, said, however, "In my opinion, it's this type of deal that is going to bring about Securities and Exchange Commission regulation of the bond industry."

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