Will history repeat itself today when the New York State Local Government Assistnce Corp. offers $450 million of revenue bonds -- its second bond sale since it was created last year?
Municipal underwriters hope not.
When the corporation, created to bond out the state's annual note sales, made its debut in the market in February, it fell on its face as far as dealers and investors were concerned. The deal, they contend, was sold in a deteriorating municipal market but not priced accordingly.
"I think underwriters can be led to the well once. You get poisoned once, you don't do it again," said one veteran of that sale.
Today's offering, however, is expected to be priced "to the market," according to one syndicate member. Market sources said preliminary price talk called for a 7.45% yield in 2007, a 7.52% yield in 2011, a 7.629% in 2019. and a discounted 7.53% yield in 2021.
Lehman Brothers is senior manager and bookrunner for the offering. Officials from the 12 other syndicate managers were expected to meet at Lehman Brothers yesterday evening to discuss the offering and municipal market conditions.
Stanley Clemniecki, executive vice president and manager of national underwriting at Lehman Brothers, said, "This is going to be a good deal."
He noted that if the market holds up, the offering should come right around where the prices of the bonds were listed in the preliminary scale released yesterday.
The market closed on a slightly weaker note yesterday, said one dealer, adding it would be difficult to gauge the potential impact of the market's tone on the deal until this morning.
"Everyone knows what happened last time," said an underwriter. "I think everyone will be cautious this time."
Traders said that even though the credit requires an annual state appropriation, they note it nevertheless has a number of built in features to ensure debt service coverage. "There's nothing wrong with the credit," one trader said.
The offering is rated A by Moody's Investors Service and A-plus by both Standard & Poor's Corp. and Fitch Investors Service. About $400 million of bond proceeds from the sale will be turned over to New York City.
"It's coming, it is not going to be increased in size, and a lot of the bad news about the state has dissipated," one market participant said of the deal. He noted that retail investors are very interested in the serial bonds and institutional investors are eyeing the $317 million offered as terms due in 2011,2019, and 2021.
At the time of the corporation's last sale in February, a souring municipal market forced Goldman Sachs & Co. as senior manager to boost yields four to seven basis points on various maturities on the $909 million revenue bond offering.
The deal was finally priced with a maximum yield of 7.37% for term bonds maturing in 2016 and 2018.
At the time, according to sources, investors balked at the sale, saying the bond were not priced cheaply enough. And the underwriters were forced to swallow most of the issue.
Some dealers speculated members of the corporations board, seeking a good price for the corporation's inaugural sale, pressured senior managers to keep the deal from being priced too cheaply.
Gedale B. Horowitz, chairman of the corporatin and an officer of Salomon Brothers Inc., could not be reached for comment.
"The last deal was no poorly placed and allotments were held, and everybody got burned," a market source said.
As for today's offering, he observed: "Peole are apprehensive because it looks like it might be setting up to be the same thing. The last deal left a bad taste in people's mouths and it takes them a while to forget it."
As part of a program to begin implementing much-needed fiscal reform in the state, the corporation was created in the spring of 1990. The corporation is authorized to sell up $4.7 billion of revenue bonds to eliminate the state's annual spring borrowing. The bonding program is expected to end in fiscal 1995.
The bonds are secured with a 25% share of revenues collected under the state's 4% sales tax. The tax money is placed into a tax fund, until appropriated by the state Legislature.
In fiscal 1992, the corporation is expected to sell a total of $1.6 billion of bonds. As each issue is sold, the allowable volume of tax and revenue anticipation notes that the state can sell in its annual spring borrowing is reduced.
For example, the state was authorized to sell up to $4.7 billion of notes under the corporation's enacting legislation. That amount was reduced to $3.9 billion when $800 million of proceeds from the corporation's last bond sale was used to make local aid payments. With today's sale, the amount of notes that can be sold in fiscal 1993 would be cut to $3.5 billion.
Staff reporter Sean Monsarrat contributed to this article.
