DALLAS -- Enid, Okla., officials say Sanwa Bank has declined to extend letter-of-credit backing for a 1987 issue because the bank plans to curtail credit enhancement for cities with populations of 100,000 or less.

"They said they were going to redline municipalities of under 100,000 population," said Morris Hatley, president of Leo Oppenheim & Co., financial adviser to Enid. He said bank officials said they would not seek new agreements or extend existing ones with cities of that size.

But a senior executive at the bank in New York denied there was a change in policy toward smaller credits like Enid, a northern Oklahoma city of 43,000.

"That's a misinterpretation," said the official, who refused to be identified. "There is no such policy change. We're looking at individual arrangements."

Later, the official added, "We are trying to keep our good relationships. This bank is committed to this business."

It is not clear how much of Sanwa's business is with cities of 100,000 people or less. Moody's Investors Service says it rates $4.2 billion of bonds backed by letters of credit from the Tokyo-based bank.

Mr. Hatley and Jim Ferree, Enid's city manager, said two Sanwa officials explained that the Japanese bank is reassessing its role in the multibillion-dollar credit enhancement business after recent high-profile crises involving cities.

"They were indicating that the bank and a lot of other regional banks in the mid-1980s saw municipalities as risk free," Mr. Ferree said in an interview. "They had responded to some of the press coverage of Bridgeport, Conn., and some other cities in the Northeast that made them believe municipalities aren't as creditworthy now."

Certainly, troubles in Bridgeport, whose aborted Chapter 9 bankruptcy filing this summer drew national attention, and problems in Philadelphia and New York City have been hard to ignore.

Just last week, the Philadelphia Water Department said Sanwa rejected a request to extend the letter-of-credit backing for an $88.5 million of outstanding notes.

But Oklahoma officials said they were confounded by Sanwa's decision in October not to renew letter-of-credit backing for a 1987 series of $24.3 million of variable-rate water and sewer revenue bonds.

After initially planning to not continue the letter of credit beyond February 1992, Sanwa agreed to a six-month extension until August. The city is already looking at alternatives, including the possibility of replacing the variable-rate bonds with fixed-rate debt.

Mr. Ferree said Enid and its adviser were most puzzled by Sanwa's decision because the city is in sounder condition today than it was in 1987, when the variable-rate debt was sold as part of a $75 million package.

"We were at the bottom of the slump then," he said. "We just failed to understand their decision."

Today, the city is financially stronger, with sales tax collections -- a primary indicator of the local economy -- up 10% over 1987 levels.

Mr. Hatley, whose firm is based in Oklahoma City, said the bonds are double-barrel with a pledge of water and sewer system revenues and a one-cent sales tax.

"They readily admitted to us that the financial condition of Enid was superior now, compared to 1987," he said.

The Sanwa official declined to discuss the reasoning for not renewing the letter-of-credit arrangements beyond a six-month extension. AMBAC Indemnity Corp. continues to insure a $50 million fixed-rate offering for the city.

A spokesman said the insurer is not having second thoughts, adding, "These things have always looked pretty strong from a credit perspective."

But Mr. Hatley said Sanwa is not alone in rethinking whose bonds it backs and at what price. He said the Oklahoma Industrial Finance Authority, a state agency, recently chose Mitsubishi Bank as low bidder for a letter of credit on a taxable bond sale.

Before the issue was ready for sale, the bank backed out because its bid was rejected by the institution's hierarchy.

"They ended up with Sanwa," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.