New York City officials said to be encouraged, not elated, following European quest for LOCS.

New York City finance officials are mildly optimistic about recent meetings held to seek European letters of credit for future city bond deals, a city source said this week.

During Mayor David N. Dinkins's six-day trade mission to Europe, Barry F. Sullivan, deputy mayor for economic development, and Michael W. Geffrard, director of the city's Office of Public Finance, told bankers in the United Kingdom, France, and Germany that New York City's economy is on the rebound and that the city is still a good place to do business and raise a family.

City officials plan to woo banks in Europe in the hope of attracting letters of credit for city bond deals, and most importantly, to expand the city's issuance of variable-rate debt.

A city official said New York City wants to use an LOC on its next bond deal, planned for the fall. The official, who spoke on condition of anonymity, said officials at several large European banks appear interested in providing the city with letters of credit. The Europeans made no commitments, he said, but city officials were encouraged.

"We certainly made progress," the official said. "It's a perception issue. Many of these executives didn't know that the city has balanced its budget for more than a decade and that crime in the city is actually going down."

Mr. Sullivan, a former top executive at Chase Manhattan Bank and First Chicago Corp, with over 30 years of banking experience, saw the trade mission as an opportunity to lobby his European banking contacts for letters of credit, according to a source familiar with the trade mission.

Mr. Sullivan and Mr. Geffrard met with executives from Barclays Bank PLC, National Westminister PLC, Credit Local de France, Commerzbank AG, and Dresdner Bank AG. City officials expect answers from these institutions in the next month. So far, the city has completed two variable-rate deals, after receiving state legislative approval to sell floating-rate securities in 1991.

Unlike with fixed-rate securities, investors demand letters of credit when they purchase variable-rate securities from lower-rated municipalities like the city. The letters give the variable-rate deal the credit rating of the bank and provide valuable liquidity when the securities are remarketed.

At the moment, the city has the LOC capacity to issue $200 million in variable-rate debt, an official with the Dinkins administration said. But city finance officials say they want to expand their variable-rate capacity to as much as $1 billion to take advantage of the interest cost savings currently associated with selling floating-rate securities. The city was granted the authority to sell variable-rate debt by the state Legislature in 1991.

City officials acknowledge that in order to issue more variable-rate debt, they need to bolster their list of LOC providers. Currently, the city has obtained letters of credit from Morgan Guaranty Trust Co. of New York, the Industrial Bank of Japan, Fuji Bank, and Sumitomo Bank.

Attracting more providers is not easy. European bankers remember well the city's financial crisis in the mid-1970s. They also tend not to lend to controversial credits, like New York City, that must deal with a myriad of special interest groups vying for a greater piece of the city's budget, an industry observer said.

Standard & Poor's Corp. rates the city's general obligation debt A-minus, with a negative outlook. Moody's Investors Service rates the city's GOs Baal, while Fitch Investors Service does not rate the city's bonds.

One industry observer who asked not to be identified described the city's chances of obtaining one or two LOCs from Europe as "50 -- 50."

"You have to remember that banks are hungry," she said. "On the capital side, business is slow. At the same time, the real estate market has disappeared, and the [highly leveraged transaction] market has dried up. [The LOC market] is one area where there's potential."

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