The U.S. Postal Service yesterday borrowed $5 billion of debt through the Federal Financing Bank, winning a five-year fight to issue callable debt.

The sale enabled the service to refinance $4.5 billion of its outstanding Federal Financing Bank debt in a move that will trim interest expenses by $2.2 billion over the next 20 years, according to the Post Service.

But while the Postal Service won the battle for callable debt, skirmishes with Treasury, of which the Federal Financing Bank is an arm, will likely continue. Still at issue is whether the Postal Service can tap the private debt markets.

Treasury Under Secretary for finance Jerome H. Powell said while the Treasury has agreed to allow the Postal Service to sell callable debt to the financing bank, it will never allow the service to finance in the public capital markets.

"The Postal Service will continue to borrow through the Federal Financing Bank and not in the public markets in its own name" he said yesterday.

Postal Service sources disagreed, however, saying the Wednesday agreement does not limit the services' legal ability to tap public debt markets in the future.

One source familiar with the discussions added that Treasury officials declined to sign a written agreement concerning callable debt, saying they did not want to bind future administrations.

In a recent interview, Postmaster General Marvin Runyon said he plans to do future financing "at the place where I can get the best rates with callable features."

An investment banking source familiar with the offering said the Postal Service got "some pretty good prices" form the financing bank on the $5 billion sale when the deal was compared with similar bond issues sold recently in the private debt markets.

"The rates are fair to on the aggressive side," the source said

The $5 billion borrowing was structured in four tranches.

The first consisted of $1 billion of non-callable two-year debt, which came at an all-in rate of 4.676%. The second piece consisted of $1.5 billion of five-year debt callable after three years, which came at an all-in rate of 6.307%.

The third consisted of $1.5 billion of 10-year debt, callable after five years, at an all-in rate of 7.367%.

The last tranche consisted of $1 billion of 15-year debt, callable after five years, at a 7.615% all-in rate.

When the Postal Service's board of governors approved issuance of up to $5 billion of callable debt early last month, the service, as required by law, first offered it to Treasury, which has a 15-day right of first refusal for all Postal Service issues.

In an Oct. 9 letter, Powell notified Runyon that the Treasury would exercise that right.

The Postal Service has done all its financing through the Federal Financing Bank since Congress created the bank in 1973. But with current low interest rates, the Service wanted the flexibility of refinancing its debt -- something the Treasury would not allow.

Powell explained that Treasury had traditionally opposed the requested call provisions because of its procedure of funding those loans with non-callable debt.

Now, however, after reviewing its policy, Treasury has determined that the risk is one its willing to take, he said.

The Treasury Department concluded that the Postal Service request to issue callable debt was a fair one and that the Treasury could fairly gauge pricing of such debt based on what market borrowers pay for it. Powell let it be known that the Treasury department had been open to considering callable debt back in August, he said.

Prior to today's $5 billion issue, the Federal Financing Bank owned all the Postal Service's $9.9 billion of outstanding debt.

The new issue brings the Postal Service's total amount of financing bank debt to $10.4 billion.

"Even though we have more debt we have less interest expense because the rate is dropping 102 basis points," Stephen Kearney, Treasurer at the Postal Service, said yesterday.

Runyon noted that the transaction was done without cost to tax-payers.

"The $56 million interest reduction we will realize in 1993 will help us reduce what could have been a $2 billion deficit this fiscal year," Runyon said. "Had we not put in place the variety of business-like steps we have over the last 120 days, we would likely have been looking at a 35-cent First class postage stamp in early 1994."

In the earlier interview, Runyon emphasized that the Postal Service has received no federal money since around 1971 and generates revenues by charging the postal rate-paying public.

Runyon, formerly chairman of the Tennessee Valley Authority, wants to make the Postal Service more like a business and has initiated a number of cost-cutting measures, including the reduction of 30,000 positions.

Under Runyon's watch, TVA cut management layers and reduced overhead costs by more than 30%, making for cumulative savings and efficiency improvements of $1.8 billion, according to a Postal Service release.

In the past 17 years, the Postal Service has increased rates at an 11.1% average, which he said is much higher than the consumer price index or any other measure.

The service has also raised rates on advertising mailers 58% in three years and he fears advertisers will seek alternative methods such as cable television and newspaper inserts. Those postal service competitors can refinance their debt, he said. The Postal Service currently pays $800 million in interests costs annually for its debt.

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