ATLANTA -- Hillsborough County, Fla., has picked Morgan Stanley & Co. to manage its long-awaited refinancing of $440 million of outstanding utility debt, a county official said yesterday.

"Their [Morgan Stanley's] proposal was chosen because it gave us the most flexibility and provides the lowest interest costs," said Edwin J. Hunzeker, assistant county administrator, noting that the selection ends a three-year effort to devise a refunding program for the county's water and sewer bonds.

Michael S. Merrill, the county's director of debt management, said the county expects to issue the refunding debt by Sept. 30, the end of its current fiscal year.

Mr. Hunzeker said the county's board of commissioners last Wednesday unanimously chose the New York City investment bank over three other competing teams of Wall Street bankers that had been designated last summer as finalists for the underwriting: Goldman Sachs & Co.; PaineWebber Inc.; and a joint venture between Smith Barney, Harris Upham & Co., and Lazard Freres & Co.

The winning proposal calls for issuance of a total of $290.1 million of bonds -- including $67.5 million of taxable commercial paper -- to refund a principal amount of $270.9 million in debt issued in three series. The debt to be refunded is: $191 million out of $213.2 million of Series 1988 bonds; $17.6 million of $145.1 million of Series 1987 bonds; and $62.3 million of $81.8 million of Series 1985 debt.

The taxable commercial paper, Mr. Hunzeker said, will be used to refund Series 1985 bonds. Restructuring this debt presented particular difficulties because those bonds were themselves refunded, making it hard to use tax-exempts in a refinancing. Under the 1986 tax law, tax-exempt proceeds from a refunding cannot be transferred without penalty.

"The use of taxable commercial paper provided a simple but unique solution," Mr. Hunzeker said. "It works because the commercial paper rates are less than the coupons on the '85 debt." He said the county also liked the fact that commercial paper would be relatively easy to retire if the county is in a position to reduce outstanding debt.

The county's financial adviser, Peter G. Kessenich, managing director of Public Financial Management Inc., described Morgan Stanley's proposal as "a real clever plan" and noted that it does not extend the maturity of currently outstanding debt beyond its final maturity date of 2016.

Mr. Kessenich said the county will have additional flexibility in arranging the financing because the plan gives the county the option to tap $21 million accumulated in the construction fund to cover debt service.

"We are not too worried about rates, because we can use these funds to help us deal with any unforeseen fluctuations," he said.

Morgan Stanley recently calculated that the financings would give the county present-value savings of $14.5 million, using a 6.85% cap on the interest rates of current-coupon bonds in the financing and a 7.30% cap on capital appreciation bond rates.

By selling the bonds, county officials hope not only to achieve present-value savings, but to reshape debt service, dampening future increases in water and sewer rates that already are among the highest in the state.

Mr. Hunzeker said that without the refinancing, the county would have likely been forced to raise rates about 20%. With the financing, which will reduce yearly debt service, the rate increase that will have to be imposed for next year will likely be well below 10%, he said. Residential customers' average monthly bill is currently about $70 per month.

The county official said additional bankers will be chosen by mid-August to round out the financing team. He also said Florida-based firms, as well as minority- and women-owned firms, would be given special consideration.

Mr. Merrill said that with the refunding completed, Hillsborough County hopes to sell about $18 million of new-money tax-exempt bonds sometime this fall to help fund a $30 million expansion of its museum of science and industry.

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