LOS ANGELES -- The city of Richmond, Calif., learned the hard way last week that the municipal market can react indiscriminately when another issuer from the same area, and with a similar name, defaults on its obligations.
Last Tuesday, Richmond tried to sell $8 million of tax and revenue anticipation notes on a competitive basis. But the city rejected the only bid it received because the rate was much higher than comparable municipals credits.
City Finance Director Jay Goldstone said Friday that he had "suspected" Richmond might one day be haunted by the Richmond Unified School District's highly publicized problems.
Last week's aborted sale confirmed those fears, he added.
But the city plans to test the waters again by re-bidding the issue tomorrow, Mr. Goldstone said, adding that several underwriters have expressed interest in the deal.
To boost the chances of success, Mr. Goldstone is trying to spread the message that investors should make a distinction between the city and the troubled school district.
The Richmond school district is entangled in legal proceedings because of its default last year on a $9.8 million certificate of participation issue. The default received broad attention, partly because one avenue of subsequent legal argument raised questions about the constitutionality of a deal that helped finance the school district's deficits.
Mr. Goldstone stressed Friday that the school district is an entirely separate credit from the city. Although the city and school district bear the same name, Mr. Goldstone noted that the school district's territory also encompasses other cities and parts of the county that are unincorporated.
Moody's Investors Service assigned its highest short-term rating, MIG-1, to the city's proposed note deal. The city last sold Trans in 1986.
In its rating report, Moody's said "adequate projected cash balances [and] the availability of alternative liquidity sources, including cash reserved for economic uncertainties and the advance segregation of repayment funds, provide the basis for [the] highest level of investor comfort."
But last week's market response failed to reflect that quality, Mr. Goldstone said.
The rejected bid, from Prudential Securities Inc., came in at 3.417%, Mr. Goldstone said. By contrast, comparably rated and sized note issues recently attracted rates below 3.1%, he added.
Another underwriter, which sent a good-faith check but never submitted a bid, indicated later it would have priced the issue at about 3.6%, Mr. Goldstone said.
Numerous factors probably harmed the bidding, Mr. Goldstone speculated. Some investors may not make a distinction between the credits because "back East, schools and cities are more intertwined," he said.
He also believes it may hurt when many reports in the press, including The Bond Buyer, often use Richmond as a short-hand reference for the school district.
But a California-based trader said this is hardly the first time the market has penalized an innocent credit that shares a name with a troubled issuer.
"Call it guilt by association," the trader said. "It's not surprising that they'd have trouble getting a bid for those things."
Richmond's redevelopment agency did not encounter similar problems when it sold a tax allocation bond refunding last winter, Mr. Goldstone said. But he noted that the deal was sold on a negotiated basis.
Pending state legislation that addresses some of the school district's problems also would change its name. From the city's standpoint, a name change would "probably be a blessing," Mr. Goldstone said.
For now, however, he hopes the market gives a warmer greeting to the sale planned tomorrow.