New York City expects to sell between $950 million and $1 billion of uninsured refunding bonds in late September or early October to defease about the same amount of outstanding insured bonds, city officials said last week.

The bond sale is the largest component in a package of bonding proposals that would provide $125 million in budget relief in the city's fiscal 1992 budget, which began July 1.

Since coming into office on Jan. 1, 1990, the Dinkins administration has been searching for ways to reduce debt service costs. The bond refunding could free up about $1 billion of insurance capacity, allowing the city to use bond insurance on future bond offerings to reduce interest costs.

City officials estimate the $1 billion refunding would provide the city with $150 million in present value savings and would translate into about $100 million in budget relief for this fiscal year.

But this estimate may be too optimistic, according to city Comptroller Elizabeth Holtzman. She stated earlier this month that a preliminary review of the bonding plan shows the savings may not be as high as previously estimated.

Nevertheless, the bonding plan is set to go forward. And to show its gratitude to J.P. Morgan Securities Corp., a co-manager in the city's negotiated bond syndicate and the firm which presented the city with the refunding plan, the city said the firm will be 'rewarded" for its efforts.

"We have not decided how the firm will be rewarded," said Michael W. Geffrard, deputy executive director of the city's Office of Economic Development. But he said one possibility would be to have the firm serve as a senior manager and possibly the bookrunner on the refunding issue.

The deal hinges on getting bond insurers and providers of letters of credit to contractually agree to insure or provide credit enhancement on future bond deals. Agreements are "close," Mr. Geffrard said.

A source close to the deal said Financial Guaranty Insurance Co. has already signed an agreement. The firm declined to comment on any impending transactions.

Mr. Geffrard said the refunding would be "economically advantageous for the insurance companies, and it is advantageous for the city."

Bond insurers would benefit because they would see their New York City credit exposure dramatically reduced, city officials say. They would also receive the insurance premiums that had been paid to them up front on long-term debt that would no longer be outstading.

As part of its fiscal 1992 budget, the city is proposing to issue up to $1.4 billion of unenhanced bonds to advance refund an equal amount of insured bonds. The city intends to use the credit enhancement capacity made available by the refunding to reduce interest costs on up to $1.4 billion of future bond issues. Under this proposal, the city would defease up to $300 million of letter of credit-backed bonds and up to $1.12 billion of insured bonds in fiscal 1992.

The city plans to refund bonds that were insured in the primary and secondary markets, a city official said at a sales information meeting on Thursday.

The meeting was called because the city also plans to sell $1 billion of tax anticipation notes in a competitive offering on July 31, and $750 million of new money bonds, which is expected to include zero coupon bonds, on Aug. 5 in a negotiated offering.

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