The Rhode Island Depositors Economic Protection Corp. today closes the book on its financing of the state's historic credit union debacle by selling tax-exempt bonds.
The state corporation is scheduled to close a $56 million tax-exempt private placement, according to Michael Fraser, deputy director of finance and administration. The transaction winds up the third of three legs in bailing out 45 credit unions that were declared insolvent Jan. 1, 1991.
The private placement also will bring compensation to 90% for the 40,000 depositors whose savings and checking accounts, totaling about $1.7 billion, were frozen last year.
The remaining 10% is to be handled through a note from Depco giving individuals a first lien on whatever funds are recovered from litigation emanating from the bailout. "It's IOU, if you will," said Marvin Markus, managing director at Kidder Peabody & Co., financial adviser for Depco. "There's excess cash flow expected."
Today's tax-exempt transaction will give buyers one of the highest tax-exempt yields possible in today's low-rate environment, with the 15-year debt carrying 10% coupons. The bonds will be placed at a slight discount to yield just over 10%, Mr. Markus said.
Four major high-yield mutual funds have given Kidder Peabody "firm commitments" to buy the municipals, according to Rene Mendez, vice president in Kidder Peabody's real estate finance group.
But the mutual funds are assuming significant risks. The issue, Depco's 1992 Series B, is subordinate to a $125 million Series A borrowing, sold last week.
The Series A securities, taxable floating-rate notes guaranteed by the U.S. Treasury, have the first claim on all excess cash from portfolio salvage efforts until the notes are retired.
After the notes are retired, the tax-exempt Series B will receive such excess cash flows for principal payments.
Both series A and B are secured by Depco's $507.96 million portfolio of foreclosed properties, nonperforming loans, and performing loans. Only 26%, or $132 million of the obligations, are performing, according to a May 8 review of the assets by Depco.
Despite, the credit-quality concerns, the prospect of 10% coupons resulted in an oversubscription for the tax-exempts of nearly 2-to-1, Mr. Mendez said.
"There are not that many deals out there with a 10% handle on them," he said, "That was enough to hold their interest while we explained the credit to them."
Samuel H. Hallowell Jr., portfolio manager of the Ocean State Tax-Exempt Fund, said he was likely to purchase some of the bonds, which are exempt from Rhode Island's income tax.
"We have bought some of this paper in the past and it turned out to be a fine investment for us," Mr. Hallowell said. "There is a real dearth of local paper in Rhode Island."
He also noted that today's bullish fixed-income market is the best time for Depco to place the debt. "The issuer should be able to save as much as $1 or $2 dollars per thousands in what they pay to have the deal done," he said.
One of the major considerations for buyers of Depco's 1992 Series B is the call structure. Although the stated maturity is 15 years, the term bonds are subject to call anytime timer the Series A have been retired. Mr. Mendez said Depco estimates the Series A bonds will be redeemed in just over two years.
The Series A and Series B bonds, with interdependent payment features and very different credit structures, are the culmination of three-and-a-half months of interdisciplinary effort at Kidder Peabody, where the public finance, asset-backed, and Treasury underwriting groups coordinated initiatives, the Kidder Peabody officials said.