BOSTON -- The Massachusetts Municipal Wholesale Electric Corp. issued about $98 million in variable-rate debt last week as part of a broad refinancing.

Officials at the corporation, which has refunded a large portion of its $1.4 billion of outstanding debt since 1992, said that through a modified Dutch auction and a well-received tender offer they will reduce their yearly debt service requirements by about $3 million.

Although the financing contained many elements, the largest and most significant was a tender offer that was initiated in October.

"We started this process by sending out an RFP for ideas about how we could diversify our debt to include more variable-rate debt," said James E. Fuller, MMWEC's assistant treasurer and the official in charge of this financing. "People came in and proposed swaps and floaters and other types of inverse debt."

But Fuller, in coordination with financial adviser John Miller, managing director of Public Financial Management Inc., decided to use a combination of different methods.

In October, MMWEC announced a tender offer for about $682 million of outstanding debt. Fuller said the corporation requested tender offers for bonds in 31 different maturities in seven different issues.

After the three-week tender period, MMWEC officials said they were surprised to find that over $500 million of bonds had been tendered.

"That was the highest response to a tender offer for a tax, exempt issue that we had ever heard about," said Fuller. "After we received the tenders we ran the numbers over a weekend to determine how we could best achieve our savings objective."

MMWEC decided to purchase $112.8 million of bonds for anywhere from 63 cents on the dollar to 99 cents on the dollar. Fuller said that no bonds were purchased over par and that the average purchase was made at 15% below par.

To pay for the purchase, the corporation sold $97.6 million in variable-rate debt. The issue was sold last Thursday as a single-term bond maturing in 2019 and priced to yield 3.70%.

The issue was sold by Bear, Steams & Co., who also acted as manager for the tender offer. Mudge Rose Guthrie Alexander & Ferdon served as bond counsel.

The yield will be reset at a weekly auction, and Fuller said the corporation retained an option to extend the resetting of the yield at either a monthly, bimonthly, or annual auction. The bonds could also be fixed to maturity.

Fuller said the corporation expects the rate to decrease to around 3.65% at the first auction, because the first rate was set to cover a two-week period between the sale of the bonds, the settlement, and the first auction.

Sinking fund installment on the issue begins in 2003.

By purchasing the tendered bonds at such a discount, MMWEC was also able to purchase several hedging instruments as protection against changes in interest rates.

For credit support and third-party enhancement, MMWEC received a letter of credit from the Canadian Imperial Bank of Commerce.

Additionally, MMWEC entered into an interest rate cap agreement with Societe Generale that states that if interest payments exceed a certain rate, the firm will pay the corporation the difference between the amount set at the auction and the amount agreed upon, hedging the corporation's debt service requirements.

MMWEC also entered into a debt service forward delivery agreement with INC Capital Markets, which increases the corporation's earning capability on a portion of the funds it deposits to make its debt service payments.

But the key to the transaction's success was investor response to the tender offer, Fuller and Miller said.

"The response from investors came from all over the board," Fuller said. "We had response on some maturities of 100% and on some maturities we had no response at all."

"We waited to mail the tender offers out until we determined what would be a fairly weak time in the market," Miller said. "These were really wonderful conditions for us, though. Investors were trying to get their portfolios in line for the end of the year, and we were one of the few buyers in the market."

Miller also said MMWEC designed the maturities they were interested in having tendered to be the ones they knew were originally bought by large investors.

"Large institutional buyers can understand the benefit of tendering bonds near to tax time," he said.

He said the interest in the variable-rate sale came from many of the large funds and insurance companies, and that the bonds were sold in $100,000 increments.

The success of the deal comes at the end of two good years for what was once considered to be one of the most troubled of Massachusetts' quasi-public entities.

The wholesale electric agency, a joint-action agency formed by Massachusetts' municipal utilities in 1969, became mired in lawsuits in the late 1980s after the Vermont Supreme Court struck down the agency's contracts to sell New Hampshire's Seabrook Project 6 power to Vermont utilities.

When the Massachusetts agency redistributed the Vermont participants' share of the costs among the Massachusetts municipalities involved in Project 6, some of the utilities challenged the power sales agreements, which backed the revenue bonds that the agency issued to finance its share of Seabrook.

After more than two years of litigation, the contracts were found valid in September 1991 by the Massachusetts Supreme Court said in January 1992 it would not review the case.

In the wake of the Supreme Court's announcement, Moody's Investors Service, which had suspended the Massachusetts agency's Baa rating in August 1988, reinstated and raised its rating to Baa1. Standard & Poor's Corp. boosted its rating of the agency to BBB-plus form BBB, and Fitch Investors Service issued its first rating on the agency, also BBB-plus.

Earlier this year Moody's raised the corporation's rating to single-A and Fitch raised it to single-A-minus.

Fuller said the success in the courts over the past two years has reinstated buyers' faith in the credit.

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