ATLANTA -- New Orleans prices its long-awaited general obligation refunding issue today in what might still be -- even with the recent drop in interest rates -- a tough test for the city.

The $174 million negotiated deal, to be insured by AMBAC Indemnity Corp., will stretch out the maturity of city's outstanding $360 million of GOs from 2004 to 2021, liberating up to $19 million a year that otherwise would have been used for debt service, for capital programs.

The refinancing will also allow the city to tap a $35 million of debt service reserve funds during the next two fiscal years for operating expenses to close a $13.5 million deficit that had been anticipated in fiscal 1991.

Given the main purpose of the offering -- to free up funds for the city during the next few years -- the issue is structured to include an unusually large portion of zero coupon bonds, which defer interest payments until maturity.

For the Alex. Brown & Sons-led syndicate, those $92.7 million of bonds, which carry due dates extending from 2004 to 2018, could present a challenge, according to institutional buyers.

"This is a big load of zeros for any one issuer and it is difficult to gauge what demand there will be for them, particularly in the longer maturities," said Ronald Blake, portfolio manager of the San Mateo, Calif.-based Franklin High Yield Tax-Free Income Fund, said late last week.

"Right now, it looks like the market will be able to absorb them pretty easily, but these bonds could be something of a wild card," he said.

Mr. Blake also pointed out that Massachusetts also plans to sell a large issue of negotiated GO debt today, a $524 million deal that includes about $60 million in zero coupon debt.

Mr. Blake said that because of the AMBAC insurance, he does not expect the market to "attach a big stigma to the issue because it is being sold by New Orleans." He also said that the $81.3 million of current interest term bonds, all of which come due in 2021, would likely be relatively easy to sell, particularly if they are priced at discount to attract buyers who are bullish on the direction of rates. Based on current rates, he expects the term bonds to be priced to yield about 6.90% and the long zero coupon bonds priced to yield about 7.25%.

Officials at Alex. Brown on Friday said they felt confident that the issue would be a success given the firm tone the market has exhibited this past week. They were particularly pleased when on Friday the Federal Reserve cut its discount rate to 5%.

On Thursday The Bond Buyer calculated that the municipal market had already matched its lowest level in 1991, with the 20-bond GO index at 6.81%.

"We feel very comfortable right now with this deal, and think it will sell well," said Eileen O'Connell Unitas, vice president and manager of Alex. Brown's syndicate department.

She also pointed to the fact that the zero coupon bonds are both non-callable and insured GOs, which she said will reassure cautious investors.

The sale today will cap almost a year of preparations for the deal that have frequently tested the patience of both city officials and investment bankers. After first considering the concept of the refinancing last fall, city officials refined their ideas early this year and laid plans for a public referendum on the bond offering in the spring.

But those plans were postponed after the city's business community grew lukewarm to the idea. And even after a July 13 date was set, city officials and business leaders continued to fret, with one business leader even suggesting that the city consider bankruptcy if the voters did not approve the referendum. To the surprise of most observers, voters endorsed the bond issue by an almost two-to-one margin.

During the past two weeks, after a group of five co-managers was added to the management group, headed by Alex. Brown and Doley Securities Inc., a squabble developed over management fees.

Peter Kessenich, financial adviser to the city's Board of Liquidation, which oversees New Orleans's borrowings, said last week that an agreement had been worked out in which the five co-managers -- Dorsey & Co.; First Commonwealth Securities Inc.; Hattier Sanford & Reynoir; Howard, Weil, Labouisse, Friedrichs; and Scharff & Jones -- would be guaranteed an allotment of designated bonds.

"I think everybody is pulling together now and is looking forward to the sale," he said.

Both Moody's Investors Service and Standard & Poor's Corp. plan to rate the issue triple-A on the basis of the AMBAC guarantee. Each of the agencies, furthermore, reaffirmed their current rating on New Orleans' outstanding debt last week.

In doing so, Stanford & Poor's vice president Jay Abrams said Friday that the agency was maintaining its A-minus rating, with a negative outlook, and added that "selling bonds to get budgetary relief is not such a good idea."

Similarly Moody's Investor's Service also said it was encouraged by signs that the city's fiscal position is improving, but was troubled by the purpose behind the refunding bonds.

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