ATLANTA -- Louisiana plans to test the validity of its proposed $130 million general obligation refunding issue in state court because the law is unclear as to what constitutes an interest rate savings, the state treasurer's general counsel said Friday.

G. Anthony Gelderman 3d, general counsel to the department of the treasury, also said the deal was likely to involve an interest rate swap, a first for a state GO issue.

Mr. Gelderman said the State Bond Commission would soon file a lawsuit to head off any challenge to the variable-rate deal on the grounds it could cost more in interest expenses than the issue it is refinancing, in violation of state law. The suit, he said, would name Louisiana taxpayers as defendants and be filed in the state circuit court in Baton Rouge.

"The suit is necessary because the law does not offer a clear definition as to what it means by 'same or lower interest rate,' which could be a question when you are dealing with variable-rate debt," he said.

Mr. Gelderman said he expects the court to be convinced that the present value savings of refunding the earlier debt -- $128.3 million remaining from the state's 1985D variable-rate bond issue -- would likely range between $2.5 million and $6.5 million. If the court rules in favor of the commission and its ruling is not contested within 30 days, the bond issue could not be challenged in Louisiana, Mr. Gelderman said.

He said the suit would be filed after a lead underwriter is named, the underwriter's counsel designated, and the general structure of the deal decided upon. The bond commission hopes to make final selection of a lead underwriter in its next meeting on Thursday, he said. It hopes to sell the deal by October.

According to state Treasurer Mary Landrieu, a subcommittee of the commission last Wednesday narrowed the list of potential underwriters to five finalists.

Those finalists, she said, are: Dean Witter Reynolds Inc. with Lehman Brothers; Howard, Weill, Labouisse, Friedrichs Inc.; Merrill Lynch & Co.; Prudential Securities Inc.; J.P. Morgan Securities with Scharff & Jones Inc.; and Smith Barney, Harris Upham & Co. with First Boston Corp.

The proposed sale would refinance $128.3 million of debt remaining from the state's 1985D variable-rate bond issue through the sale of about $100 million of variable-rate debt and about $30 million of zero coupon college savers bonds, the first time the state has sold these instruments.

Mr. Gelderman said the savings could be even greater if the deal is structured so the stream of fixed-rate interest payments due on the college savers bonds is swapped for a stream of variable-rate interest payments. A number of of other states now use this technique to save on overall interest costs.

State officails hope the deal would also allow it to obtain a less expensive letter of credit. The current letter of credit, a standby purchase agreement with Citibank N.A., is costing the state 112.5 basis points on the unpaid balance of the issue, or an average of $913,000 per year.

The GO refunding has been approved by the bond commission, which has chosen New Orleans-based Foley & Judell as bond counsel.

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