New York City achieved a lower borrowing cost on yesterday's $703 million offering of fixed-rate general obligation bonds by making it easier for retail investors to participate directly in the deal, sources close to the deal said.

"One of our ideas when we initially made our presentation to the city was that the city should be able to take advantage of the fact that the mom-and-pop buyer is looking to buy bonds directly," said Paul Kuhns, a senior underwriter at Merrill Lynch & Co., which served as senior manager on the offering.

"Typically in the past, the retail demand in a transaction like this was largely satisfied through secondary market purchases," he added.

Kuhns said municipal bond funds continue to liquidate their positions as cash flows from individual investors diminish. These investors, weary of seeing the net asset values of the funds they hold drop, believe that they can fare better by investing directly in municipals, he said.

What typically happens with bond sales, though, is that bonds with maturities of up to 10 years -- the type that individual investors usually want -- are first snapped up by the street and are then turned over a few times before they reach the retail investor.

"And unfortunately, that turnover you end up having to pay for," Kuhns said.

Hoping to capitalize on the direct buying trend and achieve a lower borrowing cost for the city, Merrill Lynch released a retail-only marketing scale last Wednesday and held a retail-only order period that ran from last Thursday until Tuesday.

The effort marked the first time the city has taken such an approach, he said. After that, institutional orders were taken as with any other deal, Kuhns said.

He added that the approach also benefited institutional buyers by insuring a broad distribution base for the deal in a market where buyers are sparse these days.

"The institutions that actually have stepped up to these aggressive levels to own bonds feel better because they are not going to see the bonds flipped out the next day," he said.

Kuhns estimated that courting those retail investors saved the city roughly five to l0 basis points of yield in the maturities that were heavily subscribed for by retail buyers.

Valerie Johnson, director of Merrill Lynch's public finance group, added that the unusual effort was put together in the rougly two-and-a-half-week period since the city announced its syndicate.

Yesterday's $703-million fixed-rate offering is part of a $1.3-billion deal, the remainder of which will be priced next week. The serial bonds were priced to yield from 5% in 1996 to 7.45% in 2011.

The deal also featured three term bonds, which the city was able to issue for the first time, as a result of recent revisions in city law.

A 2013 term, containing $72 million, was priced to yield 7.48%. A 2016 term, containing $121 million, was priced to yield 7.52%, and a 2020 term, containing $154 million, was priced to yield 7.55%.

Richard J.Moynihan, director of portfolio management at the Dreyfus Corp. passed on the deal, finding it "not cheap enough."

Moynihan said Tuesday's election, which saw George Pataki unseat incumbent Mario Cuomo, will have no immediate impact on New York City's credit rating. New York City Mayor Rudolph Guiliani had endorsed Cuomo.

"I think that over time we may come to different conclusions perhaps, but I think near-term it appears as though it's going to be business as usual," Moynihan said. "The city seems to be on its own path, and I don't think that's going to be disturbed."

Robert W. Chamberlin, a senior vice president and supervisory municipal analyst at Dean Witter Reynolds Inc., thinks other issuers may follow the city's example.

"You market to retail because that's where the cash is that's available for investment," Chamberlin said. "I would think that others will be paying more and more attention to this kind of approach."

Chamberlin said investors have been leaning toward direct investment in municipals for a couple of reasons.

"It's the absence of a date on which they get their money back, and it's the fact that substantial numbers of bond funds were sold with derivatives, which means that their downside has been substantially greater than the bond market itself," he said. "You were hurt by being in a fund."

As for the city's credit outlook, the "wild card" right now is speculation about how the relationship between Pataki and Giuliani plays out.

In secondary trading yesterday, dollar bonds ended up 1/2 point, after having been up 5/8 to 3/4 point earlier in the day. Yields on high-grade issues fell by five basis points.

"The market rallied on the cash side primarily due to the arbitrage accounts," a municipal trader said. "Everybody that had an arbitrage is buying today."

Because the municipal contract has gotten so rich, players shorted the contract and bought cash, the trader said.

In debt futures, the December municipal contract settled up 23/32 to 82 26/32. Yesterday's December MOB spread was negative 460, compared to negative 469 on Wednesday.

The 30-day visible supply of municipal bonds yesterday totaled $4.959.2 billion, up $914.3 million from Tuesday. That comprises $2.117 billion of competitive bonds, up $347.7 million from Tuesday and $2.842.6 billion of negotiated bonds, up $566.5 million.

Standard & Poor's Corp.'s Blue List of municipal bonds was down $102.8 million yesterday, to $2.06 billion.

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