CHICAGO -- The St. Paul, Minn., Port Authority said yesterday that its industrial development revenue bond program will now be backed by a letter of credit to achieve an investment grade rating on the bonds.

The enhancement on the industrial revenue bond program is also designed to allay market concerns rooted in problems with the St. Paul authority's Resolution 876 Common Revenue bonds -- which are not related to the industrial revenue bonds, an authority official said.

The St. Paul authority's revenue bond program, entitled the Business Development Financing Program, will finance industrial expansion loans to companies in the St. Paul area. The financing program revised another program created in December 1990. The 1990 program, which was to be financed by unenhanced revenue bonds, was left without an investment grade rating by at least one of the two major rating agencies.

Dan Aschenbach, a vice president in the central regional ratings group at Moody's Investors Service, said that several years ago the St. Paul authority met with Moody's officials to discuss the possibility of receiving an investment grade rating on the 1990 program's unenhanced revenue bonds.

Aschenbach said that the rating process on the original bond program "did not get to a conclusion" because Moody's officials would not issue an investment grade rating without assurances on the security of the bonds.

Standard & Poor's Corp. officials could not be reached for comment.

Mike Strand, the authority's vice president of communications. said that "early decisions [about the 1990 program] by rating agency officials were based on market perceptions, not on the merits or creditworthiness of the program."

The letter of credit is also designed to ease market worries about the authority, which is negotiating with institutional bondholders to restructure its Resolution 876 bonds to avoid an anticipated default of $322 million in the year 2000, Strand said.

Strand said that the new bond program and the 876 program are totally separate. The Resolution 876 bonds were issued for commercial developments and were backed by lease payments. Defaults on the payments led to problems in the 876 portfolio.

Ken Johnson, the authority's president, said in a press release that the letter of credit from First Bank System in St. Paul will provide the authority with "board access to to the national tax-exempt bond market and an A rating."

About $9 million of reserve funds from a previous bond issue will also back the bonds, according to Strand.

Strand said that Business Development Financing Program is the "first significant loan program" for industrial development in the St. Paul area since the 1990.

"It puts us four-square back in the lending business for industrial expansion," Strand said.

Both authority and First Bank officials will jointly review applications from companies applying for the loans.

Strand said that authority officials hope to issue the industrial development bonds by the end of the year. He said that the size of the bond issue will depend on the amount of companies that apply for loans. Strand said that the authority intends to issue $65 million to $70 million of bonds over the next 15 to 20 years. Companies will be limited to borrowing $5 million per project.

Strand said that "more than a dozen" companies have expressed an interest in the loans.

Peter Sausen, assistant commissioner for debt management for Minnesota, said that the bonds would fall under the state's private activity cap. In calendar 1993, the remaining allocation for small manufacturing issues, which the authority's bonds would fall under, is $6.25 million.

In calendar 1994, the total allocation for the issues will be $67.2 million of the state's total $224 million private activity cap, Sausen said.

Sausen said that the authority will be required to submit an application to the state Department of Finance to receive a certificate of allocation before the bonds are issued.

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