WASHINGTON -- The Michigan State Building Authority is taking advantage of low interest rates to consolidate and refinance $15 million of its high-rate vendor equipment leases into a master lease offering.

The authority's Series, 1992A lease revenue bonds, with final maturities in 1997, are expected to draw rates between 4% and 5% -- about half the 8% to 10% rates the state has been paying on its piece-meal vendor financings, said Tom Saxton, executive director of the building authority.

To finance new equipment purchases, the state is adding $1.2 million into the offering, which is scheduled for this week.

Consolidating the leases is a good move for the recession-strapped state, said Steve Nelli, a vice president at Standard & Poor's Corp., which rates the issue AA-minus. The decision also serves as a prototype for other states that are seeking to cull savings from the vendor lease area, he said.

Unlike California, where the powerful vendor leasing industry last month defeated to bill authorizing master lease offerings for the fifth year in a row, Michigan has not encountered stiff resistance to its attempts to consolidate vendor leases, Saxton said.

The state's previous master lease offering, a $19 million deal in 1989, followed state legislation the previous year authorizing the building authority to sponsor equipment offerings.

The savings from the latest offering will not be as great as the interest rate differential suggests, Saxton said. The state hopes to save about 5%, or $800,000, on the vendor leases after prepayment penalties cost of issuance and other factors are taken into account, he said.

"You get vendor leases that have buyout provisions, prepayment penalties, or soft costs that allow the vendor to recoup installment fees or other costs that might have been amortized over the life of the lease," Saxton said. "That really eats into your savings."

The savings from the first master leasing deal was much greater because it refinanced leases with double-digit rates averaging above 10%, he said.

The state has been getting better rates on its vendor deals since the first master lease issue, he said, probably because vendors are aware of the state's intent to continue generating as much interest rate savings as possible.

"The vendors themselves are starting to sharpen their pencils," he said. "They sense the competition from the building authority. From our perspective, if a vendor could do it at a similar rate to ours, we're glad to let them do it."

The state expects to get the greatest savings not through the refinancing of vendor contracts with their sometimes costly prepayment provisions, but rather through originating master lease financings of equipment purchases, Saxton said.

But because of recession-induced limits on equipment purchases within the state and the federal tax code's restrictions on blind pools, he said no further master issues are "on the horizon," and it is difficult to predict when the state will sponsor another one.

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