Sanwa Reported Unwilling To Back Small-Town Debt

Japan's Sanwa Bank has declined to renew letter-of-credit backing for an Oklahoma town's 1987 bond issue and is generally curtailing the enhancement of small municipalities' credit, officials of the city said.

Sanwa officials "said they were going to redline municipalities of under 100,000 population," said Morris Hatley, president of Leo Oppenheim & Co., financial adviser to Enid, Okla., which has 43,000 residents.

Mr. Hatley said the bank would not seek new agreements or extend existing ones with cities so small.

Bank Denies Policy Shift

But a senior executive at the bank in New York denied any change in policy toward smaller credits like Enid.

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

It is unclear how much of the Japanese bank's business is with cities of 100,000 people or less. Moody's Investors Service said it rates $4.2 billion of bonds backed by letters of credit from the bank, which is based in Osaka. Sanwa was ranked fourth in the world at yearend 1990, with $402 billion in assets.

Mr. Hatley and Jim Ferree, Enid 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 municipal finance crises.

Frightened by Bridgeport

"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."

Bridgeport's aborted Chapter 9 bankruptcy filing last summer drew national attention. Economic and fiscal problems in Philadelphia and New York City have also gained widespread notice.

Last week, the Philadelphia Water Department said Sanwa rejected a request to extend letter-of-credit backing for $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 in variable-rate water and sewer revenue bonds.

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

Mr. Ferree said Enid and its adviser were puzzled by Sanwa's decision because the city is financially sounder 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 northern Oklahoma city reports sales tax collections - a primary indicator of the local economy -- up 10% from 1987 levels.

Enid's Progress Acknowledged

Mr. Hatley, whose firm is based in Oklahoma City, said the bonds are double-barreled, 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 of the bankers.

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

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