One of the largest deals on this week's competitive slate is the debut offering of the Rhode Island Convention Center Authority, $225 million of revenue bonds expected to be sold today.
The authority is planning to use the proceeds to retire $100 million of notes that mature Nov. 21. The deal will also raise new money for what could end up being a $290 million project including a convention center, garages, and two affiliated hotels.
The offering comes to market following charges that the hotels would be quickly sold to private investors.
The accusation was made last spring by owners of existing hotels in Provindence, who complained that the authority's plans would give the advantage of tax-exempt financing to new players in an already crowded arena. At one point, a hotel owner even threatened to file suit to block the deal.
While the proceeds of the deal being sold today are not expected to finance hotel construction or acquisition, the entire package involves building one hotel and buying an existing hotel in downtown Providence.
A second borrowing, of roughtly $50 million, will finance the hotel project and is expected in December or early next year.
Arthur Robbins, owner of the Providence Marriott Hotel, opposed the hotel portion of the deal last spring when the state legislature held public hearings on it. Yesterday, Mr. Robbins said that, given the state's already glutted market, he still feels the same way.
According to Mr. Robbins, the hotel occupancy rate in Rhode Island this year is more or less flat compared to last year's, even though average room rates have fallen.
But the controversy, and questions over whether a recession-wracked state can afford to launch a major convention center development, is not dampening Wall Street's interest in the deal. One source predicted that at least five syndicates will bid and that the net interest cost to the issuer should be on the order of 7%.
Goldman, Sachs & Co. and First Boston Corp. are expected to head one account, while Dillon. Read & Co.; Kidder, Peabody & Co.; and PaineWebber Inc. are expected to head others.
A sample scale early yesterday, according to one source, showed the deal with a maximum yield of 6.80% in 2023, if the deal qualified for insurance. In late afternoon, the Municipal Bond Investors Assurance Corp. offered to insure the deal, and the issuer accepted.
Also late, in the day, a sample scale showed the deal priced with a maximum yield of 6.93% in 2023, if the bonds had come to market without credit enhancement. The early maturities, with 9.25% coupons and hefty premiums, were tailored to meet the desires of trust departments hungry for cash flow, while the lower-coupon bonds on the long end were priced to carry high yields attractive to bond funds.
One Rhode Island fund manager, not speaking for attribution, said he expected that retail demand in Rhode Island will be strong because of the paucity of paper in the Ocean State. He said in-state brokerages could sell $20 million of bonds retail, with the rest of the deal finding homes with institutional investors.
The fund manager also said he would avoid the deal because it is backed by a lease with the state government, which must appropriate money for lease payments annually.
For that reason, credit rating agencies have assigned lower ratings to the deal than to the state's own Go debt. Standard & Poor's Corp. rated the bonds A, while affirming Rhode Island's outstanding $551.6 million of GOs at AA-minus. Moody's Investors Service rated the bonds A, lower than the Aa it gives the state's GOs.
In addition, the project is not expected to generate enough revenues to pay for itself. "It won't be making any money for some years to come," the fund manager said. "I typically buy quality and underlying fundamentals, and the fundamentals are just not there on this issue."
Rhode Island ran budget deficits in the past two fiscal years, fully depleting a budget reserve fund of more than $37 million. The state's current year revenues are now expected to fall at least $20 million short of the $1.452 billion that had be n expected.
Despite the bleak backdrop, there is optimism at Fleet/Norstar Securities Inc., financial adviser on the convention center deal, that the state's fiscal and economic ills will not pose any problems. "The state is a good name," said Maureen E. Massiwer, senior vice president at the firm. "Rhode Island has a history of handling economic downturns very well."
Ms. Massiwer noted that the state's recent general obligation bond offering was well received by the market. The $164.63 million of GOs sold Oct. 4 came to market competitively, and were won by a J.P. Morgan Securities syndicate with a maximum yield of 6.45%.
She said the convetion center authority has used competitive bidding to lower its costs in a number of areas. For the hotel, according to Ms. Massiwer, the authority managed to convince Westin Hotels to give a franchise and to allow the hotel's management to be put out for bids to a third party. "They got a management contract far below the average," Ms. Massiwer said.
In spite of the growing popularity of negotiation for large municipal bond issuers, Ms. Massiwer said that the convention center authority board was determined to maintain its emphasis on competitive bidding.
But the use of competitive bidding on the debut deal of an issuer in an economically suffering state raised a question in one banker's mind.
"Why is a deal of this size coming competitive as opposed to negotiated?" asked one public finance banker. "A deal of this size from a credit of this nature should be coming on a negotiated basis." the banker said. "There's a lot of uncertainty there and when you do a competitive bid on an uncertain basis you're going to pay for it?"