In response to the Orange County, Calif., debacle, dealers and mutual funds are compelling municipalities seeking to sell debt in the primary market to disclose information about their investment policies and practices before coming to market.
Meanwhile, in the secondary market Wednesday, prices firmed to finish as much as a half-point higher, despite the emergence of approximately $350 million to $400 million of bid lists from mutual funds and crossover buyers.
In the primary market, issuers are feeling a new but not unexpected scrutiny of their investment practices.
"Every lead manager in an underwriting syndicate has called an issuer to see what they do and what they have in their investment pool" one municipal dealer said.
"People are extremely scared, especially when you have places like Auburn, Me." reporting losses, the dealer added. "The market is not waiting [for regulators!. They're taking it on their own" to investigate investment practices, he said.
As an example of that, Seattle, Wash., which sold $115 million municipal light and power revenue bonds competitively Wednesday, received inquiries on its investment practices prior to the sale, said Brian McCartan, debt manager for Seattle.
"Bidders were interested" and "investors are prudently asking questions," McCartan said.
In response, the city sent out a release outlining its investment policy. The release states that no leveraged investments are owned by the city, and no city funds are invested in any "pure" derivatives, such as swaps and strips.
CS First Boston placed the winning bid on the Seattle "City Lights" offering, which carries Double-A ratings from both Moody's Investors Service and Standard & Poor's Corp. The true interest cost was 6.6293%. Serial bonds were priced to yield from 5.25% in 1998 to 6.70% in 2014. Term bonds, comprising $13.4 million maturing in 2016 and $33.54 million in 2020, were priced to yield 6.75% and 6.80%, respectively. The bonds maturing in 2020 are insured by Financial Guaranty Insurance Co. and rated Triple-A.
Underwriters reported an unsold balance of $24 million on the deal late in the session.
Dealers said the pricing on the deal was aggressive. Bidding for the bonds was tight, a First Boston official said. The offering was attractive in light of the dearth of issuance in the market and its high-quality ratings. Most syndicates had a good book of presale orders on the deal, the First Boston official added. Buyers included property and casualty insurers, bond funds and retail investors.
In other competitive action, a Smith Barney-led group won an offering of $43.9 million Nevada limited tax general obligation bonds.
The bonds are rated double-A by Moody's and S&P. Serial bonds are not reoffered in 1995 and carry a maximum yield of 6.65% in 2014. A $4.9-million term in 2008 also was not reoffered to investors. An unsold balance of $7.6 million remained late Wednesday.
Dealers attributed the large volume of bid lists to a flood of redemptions at mutual funds following news of Orange County's plight as well as some profit taking by crossover buyers.
While long-term mutual funds were hit with outflows in the wake of Orange County news, the short-term market for tax-exempts firmed for the first time in several sessions, dealers said.
Yields as much as 80 basis points higher than levels seen one week ago on municipal notes pulled crossover buyers into the market. Money market funds also were doing some selective buying, dealers said.
One dealer quoted yields on general market short-term California notes maturing in June 1995 at 4.80%. Last week yields on similar securities were in the 4.00% range, the dealer said.
In other secondary action, dealers said Washington Public Power Supply System revenue bonds showed no reaction to news that the Clinton administration has proposed selling the system's owner -- the Bonneville Power Administration -- to help finance a middle-class tax cut.
Explaining the lack of price movement, one municipal analyst called the proposal "a trial balloon" which seemed unlikely to occur. "It's too much `what if' for somebody to take a position on," the analyst said.
Meanwhile, Oregon's senior senator scoffed at the proposal.
"Any proposal to sell Bonneville is preposterous on its face, and downright menacing to the residents and resources of the Pacific Northwest," Sen. Mark O. Hatfield, R-Ore., said in a release Wednesday.
"It currently carries over $16 billion in debt, and the uncertainty in the future cost of its electricity, due to unknown salmon costs and competitive pressures, probably makes it unattractive to investors," Hatfield added.
The Bonneville Power Administration, headquartered in Portland, Ore., owns and operates the WPPSS nuclear power plant and 30 hydroelectric dams in the Northwest. The BPA sells power generated by the facilities to utilities in that region.
The 30-day visible supply of municipal bonds totaled $3.01 billion Wednesday, down $205.6 million from Tuesday.
Standard & Poor's Corp.'s Blue List of municipal bonds held in dealer inventories rose $41.4 million, to $1.54 billion.
The March 1995 MBI futures contract settled at 84-28, up ?? on the day. The March MOB spread was negative 463 versus negative 470 Tuesday.
