Time is up for a Mutual Benefit Life Insurance Co.-backed, fixed-rate municipal issue.

Last-minute negotiations between the ailing life insurer and the trustee for the deal -- the $21 million Fulton County, Ga., Series 1985E -- broke down late Friday, leaving the trustee bank no choice but to advise bondholders that the bonds will be called and that a default will result.

Mutual Benefit and Citizens and Southern Bank of Atlanta, the Fulton County deal's trustee, were working on a plan that would keep the bonds from going under. The plan gave both the life insurer and bondholders one year of breathing space, but Mutual Benefit chose to ignore the option at the last moment.

"Now we have to send a default notice that sets forth the default remedies under the indenture," said Kevin Kirby, vice president at Citizens and Souther Bank. "You are actually going to have a principal default."

On Wednesday, Sept. 4, Citizens and Southern will sent to bondholders a notice that leaves them very little room for maneuvering. Essentially, bondholders will be given the choice whether to approve the acceleration of the bonds -- which would involve foreclosing on the owners of the underlying property -- and whether to approve the selection of a receiver to oversee the foreclosure and sale of assets, according to Mr. Kirby.

If the negotiations had succeeded, Mr. Kirby said, bondholders would have been given the more palatable option of avoiding foreclosure. They could have elected to keep the bonds outstanding and receive the current 8 1/4% coupons over the next 12 months, overruling the indenture's requirement that the bonds be called.

Furthermore, if Mutual Benefit had approved the arrangements, the Fulton County issue would have served as a blueprint for the rest of the fixed-rate bonds insured by the life insurer. The next issue slated for mandatory call is the $10.3 million Phoenix Ariz., Series 1984 deal, which has an Oct. 1 put date. Texas Commerce is the trustee for that deal.

Foreclosure proceedings, on the other hand, are likely to result in the project owner declaring bankruptcy and investors having more doubts overshadow their principal. At least 25% of the bondholders must approve the foreclosure for it to go through.

Officials at Mutual Benefit did not return phone calls Friday afternoon. Recently, the insurance commissioner appointed a new rehabilitator, Victor Palmieri, to handle the Mutual Benefit conservatorship.

In early July, Mutual Benefit was taken over by New Jersey Insurance Commission to staunch a flood of policy surrenders. The regulatory seizure jeopardized 59 municipal issues -- totalling $809 million -- whose principal and interest had been guaranteed by the life insurer.

The threat to the deals was manifested in two ways: The variable-rate issues underwent "failed remarketings" because Mutual Benefit no longer stood behind the weekly put mechanisms, removing the liquidity; and the fixed-rate issues, which have longer-dated puts, are required by the indentures to be called because of Mutual Benefit's "bankrupt" status. A call would mean default since the life insurer is refusing to make principle payments.

Three other Mutual Benefit-backed deals also faced deadlines last month. The deals were all variable-rate and held almost exclusively by institutional investors, such as money market funds. These investors directed the trustee -- again, Citizens and Southern Bank of Atlanta -- to keep the bonds outstanding and await developments from Mutual Benefit, according to Mr. Kirby.

The variable-rate bonds, sold by the Nashville and Davidson County, Tenn., Metropolitan Government Industrial Development Board, include the agency's $15.5 million Series 1988A; the $9.4 million Series 1988B; and the $7.5 million Series 1988C.

In both the variable-rate and fixed-rated deals, the issuers and investors were required to come up with an alternate guarantor to avoid default. The variable-rate deals needed another guarantor by Aug. 13, but investors' directions staved off the default.

Still, the Nashville and Davidson Industrial Development Board made no effort to secure another guarantor for the deals. Bobby Davis, counsel for the development board, said the onus lay with the trustee. "We haven't made any efforts or attempted to find a guarantor," he said. "The trustees never contacted us."

The pivotal development that would save all 59 municipal issues from default is the location of an alternate guarantor. Since an insurer could not be found for the Fulton County issue and the three Tennssee deals, all four faced principal defaults.

Mr. Kirby of Citizens and Southern held out the hope that Mutual Benefit would see its way clear to approving the proposed structure and that the Fulton County issue, much of which is held by small investors, could avoid a call and subsequent default, but he admitted the occurrence was remote.

"We hope some future communication regarding the default will be coming from Mutual Benefit," Mr. Kirby said. "But we're in a hard spot. We have to get these notices out."

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