Gary Krellenstein of Lehman had the highest vote tally of any analyst in the 1992 All-American Municipal Analysts program.

His total helped lift Lehman's team to third place, from a sixth place-finish in 1991, and enabled him to garner top honors in the industrial development bond/pollution control revenue bond category.

During 1992, Mr. Krellenstein believes the primary reasons for his landslide victory were:

Lehman's commitment to publish reports on municipal bonds that are of high quality.

Provide timely investment/credit-quality advice.

Bonds Defined by Structure

IDB/PCR bonds are defined by their structure, rather than credit type, Mr. Krellenstein noted. About $100 billion in par value of IDB/PCR bonds are currently outstanding, he estimates.

Basically, a municipal entity issues tax-exempt bonds that are supported by the revenues of a corporation. Thus, an analyst may be required to understand the creditworthiness of utilities, paper companies, airlines, or shopping malls. "These companies are usually reviewed by analysts found on the corporate desk," Mr. Krellenstein said.

In the sector, he identifies several noteworthy trends.

First, a large number of high-coupon bonds have become eligible for current refunding. These IDB/PCRs were ineligible for advance refunding under the municipal conduit structure that enables the bonds to be tax-exempt.

Based on IDB/PCR volume in 1982-1985, about $40 billion in refundings can be expected over the next three years. Additionally, municipal bonds were paying about 10% to 12% in the early to mid-1980s, so even a sharp 100 basis-point jump in current rates won't dissuade these issuers from refunding programs.

Second, modified dutch auction tender programs have enabled companies to attempt to buy them outright in the secondary market, prior to their call dates.

"These companies pay a premium price" to attract sellers in the secondary market, Mr. Krellenstein said.

More Ways to Add Value

While just picking a couple of bonds that will become subject to dutch auction would probably be a solid year for some analysts. Mr. Krellenstein has found more ways to add value.

"Because IDB/PCR bonds are backed by a wide variety of credits," he said, "these bonds are a great way for investors to diversify their portfolios."

Also, extraordinary call provisions associated with some bonds in the sector offer investors opportunities to profit. "You have to dig to find the information about the extraordinary calls," Mr. Krellenstein said.

"But, despite the fact that many investors are shying away from an issue, you might find the extraordinary call provision is difficult if not practically impossible for an issuer to exercise," he said. "The bond may be purchased for 115 but be worth 130."

These recommendations enable Mr. Krellenstein to knock in home runs for investors.

"At the same time, you might discover the extraordinary call allows a troubled issuer to level a building and cease paying on the bonds," he warned.


Mr. Krellenstein recommends PCR/IDB issues for Georgia Power for investors looking to diversify. Also, he likes issues backed by Arizona Public Service Co. and Philadelphia Electric Co.

He strongly recommended the purchase of bonds guaranteed the National Rural Utilities Cooperative Finance Corp. (CFC). Subsequent to his strong buy recommendation, the bonds were upgraded.

He emphasized the depth of the IDB/PCR market, which is often incorrectly estimated in industry volume surveys because they are listed as obligations of the municipality issuing the bonds.

For example, Georgia Power has over $1 billion in PCR bonds outstanding and CFC has guaranteed outstanding PCR/IDR bonds worth over $2.5 billion.

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