Trash is a valuable commodity in the municipal securities market.

Yesterday, PaineWebber Inc. sold two bond issues to finance the construction of wastepaper recycling plants: a $194 million transaction for a plant in Michigan and a $15 million issue for a facility in Philadelphia.

Both bond issues will finance construction of facilities that are capitalizing on the public's desire to use recyclable materials, decrease landfill space, and increase state, local, and federal mandates to use more recycled materials.

The transactions were completed by Paine Webber's Philadelphia office and investment banker George Longo. A managing director at the firm, Longo is widely regarded as the industry's leader in structuring such deals. So far, he has completed five issues.

While Longo and his team of bankers work out of Philadelphia, they have underwritten millions of dollars of debt in processing plant deals throughout the country.

Sometime next year, American Power, which is backing the Philadelphia issue, will sell a $150 million to $200 million issue to build a plant in South Amboy, N.J., and PaineWebber - through Longo - will likely serve as the issue's underwriter.

Many cities and states have tough recycling laws. Recently, Philadelphia enacted a law requiring all office buildings and apartment buildings to separate their trash for recycling.

In October 1993, President Clinton signed an executive order requiring that 20% of each sheet of office paper the federal government buys to consist of "post-consumer recycled paper," or paper already used by office workers.

By 1998, 30% of each sheet of paper must consist of the post-consumer variety.

The mandate has added to an already healthy market for the sale of office trash. The need for recycled trash has created the need for facilities to process the material. As a result, companies are turning to investment bankers in the municipal bond market for tax-exempt financing.

"This is capitalism at its best," Longo said.

The financings also serve the function of helping boost profit margins on muni deals. Spreads on the paper deals are significantly higher than those for plain-vanilla municipal bonds. This year, the average gross spread for industrial development issues is $9.97, according to Securities Data Co.

Longo would not provide the exact takedown, or the firm's profit margin, on the Philadelphia deal. But he said spreads on such issues are "in the neighborhood of $20 a bond." PaineWebber will also receive a $1 million to $3 million project advisory fee.

Market observers say Longo and his team have underwritten the lion's share of these issues, a view that Longo shares. He said his work in this field began four years ago, when American Power sought financing to build a recycling mill long before the presidential mandate.

The high-margin deals also helped Longo and Kidder's Philadelphia office move to PaineWebber, which acquired Kidder in October of this year. The pulp financings account "for a huge chunk" of the Philadelphia office's revenue, Longo said.

The market for recycled pulp has grown, thanks to govemmental mandates and the public's support for recycling. Even so, local officials across the country have complained that unfunded mandates, such as those involving recycling, are busting municipal budgets.

But both McGrath and Longo see in these mandates an opportunity to make money. "We can sell this pulp at a price that is competitive with virgin pulp," McGrath said.

"If a hauler can sell his trash instead of having to pay to dump it, that's pure market capitalism working," Longo added.

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