WASHINGTON -- Are the $250 million of lease revenue bonds that Texas issued for the Superconducting Super Collider a good investment or a disaster waiting to happen?

The question has spawned a hot debate now that Congress has decided to pull the federal funding plug on the $11 billion nuclear physics research venture.

While no one expects Texas to stop paying off the lease issue anytime soon -- it has appropriated debt service payments through August 1995 -- beyond that, the bonds' risk is strickly in the eye of the beholder, according to interviews with more than a dozen investors, insurers, rating analysts, and dealers.

In recent weeks, Texas officials from the governor on down have pledged to continue appropriating the lease payments even in the face of the federal retreat, and they are said to be contemplating an early redemption of the bonds, which were issued in December 1991.

But under the bond documents, the state is not legally bound to its pledge, and the issue offers virtually no recourse for investors if the state does not honor it. In addition, some investors said that the political risks behind the lease securities have escalated and will only increase with time, should the state decide to leave the bonds outstanding until maturity. Of the $250 million total, $156.1 million bonds mature in December 2021. Another $49.85 million are due in December of 2012, and the remainder of the bonds have maturities ranging from 4 to 14 years.

"This issue would be a clear candidate for the state to walk away from, except that the state has a pretty unblemished record and nobody wants to be the first to contemplate a default" that would be so much in the public's eye, said Richard Ciccarone, director at Kemper Securities Inc.

Ciccarone said his firm " never was too keen" on the collider lease bonds, and has never held any of them.

On the other side of the debate, the rating agencies express utter confidence in the state's willingness and ability to pay the bonds. So far they have declined to downgrade the bonds, a stand that has touched off some strong criticism.

Standard & Poor's Corp. announced that it was reaffirming its Aminus rating of the bonds only two weeks after House and Senate conferences decided to kill the project on Oct. 21. The bonds also continue to enjoy A ratings from both Moody's Investors Service and Fitch Investors Service, although Moody's has placed the issue under review.

Officials of the Franklin Texas Tax Free Income Fund, which holds some of the issue, defended the high ratings and said they also strongly believe that the state will continue to pay the bonds, despite some heightened political risks.

"I can see things getting ugly -- there'll be a lot of pushing and shoving -- but when all is said and done, I think the bonds will get paid," said Rafael Costas, a Franklin researcher.

But the rating agencies' so far unblinking stance came in for criticism from some other investors, dealers, and the insurance companies, who said that the A ratings simply do not reflect reality or the escalating risks behind the bonds.

"How can the bonds have the same rating now as before the project was terminated?" asked one incredulous insurance official.

Richard Lehmann, president of the Bond Investors Association, said the rating agencies should downgrade the issue, although he cannot entirely blame them for not doing so.

"That's not my idea of meeting the needs of investors," Lehmann said. "But when this kind of situation happens, the ratings go out the window and are no longer the measure of quality, because the risk are unquantifiable. Political risk is now the greater risk element in the bonds, and nobody has figured out a way yet to quantify such risks."

Institutional Holders Are ~Much More Sensitive'

"Institutional bondholders are going to be much more sensitive" than the agencies to the issue's political risks, and they at this point are making their own judgments, Lehmann said.

In the week following the conferees' cancellation decision, a $450,000 batch of the issue's $3.455 million of five-year bonds was offered at a 5.90% yield, nearly two full points above the 4.15% average yield for five-year paper elsewhere on the market.

"That's not what you'd expect for A-rated paper," Lehmann said.

A Texas bond dealer said that since the notes were originally offered at 6%, the investor may simply have been anticipating a par call of the bonds.

But Lehmann said that, because of investors' wariness, the bonds probably "will trade at some discount until this issue has been put to rest after a few years." Ciccarone agreed that "the price volatility will probably be significant for a while."

What are the political disaster scenarios some investors see hovering over the issue?

"The situation may change as time goes on and people realize they're paying for a black hole, literally," said Ciccarone. Right now Texas stands by the debt for the project, which is only 20% completed, but opposition could arise if the state's economy detriorates and its currently strong finances become strained, he said.

"Over time, year after year as the debt service becomes more of a pointless appropriation, I think pressure will be coming on these bonds," Lehmann said. "The issue is not necessarily a settled one just because the state said it would do the honorable thing and stand behind it."

Down the road, the current political players in Texas could become vulnerable to opponents who see the project's failure as a political opportunity, Lehmann said.

Such political opposition surfaced last year in Brevard County, Fla., where several commissioners were unseated in an election last year because of their support for an unpopular county office building financed with a lease issue. Once elected, the opponents of the lease quickly held a voter referendum on the question of whether to stop payment, which was only narrowly defeated last March.

The collider project and its lease financing could become the targets of such voter ire, especially with the collider's remnants standing as a monument to the state's failed bid to sponsor the project, Lehmann and other analysts said. A bond dealer living near the project's site in Waxahachie, south of Dallas, said that such a public backlish is not out of the question.

"This is precisely the type of debt issued that tends to draw political heat," Lehmann said.

"All it takes is somebody to make the suggestion that they not pay for this thing, that it's the federal government's fault and somebody else should pay for it. The next thing you know, somebody makes that his campaign platform, and then somebody goes into court and says the state had no right or authority to obligate itself," Lehmann said.

Steve Nelli, director at Standard & Poor's, acknowledged that the issue could fall prey to problems over the long term. "The state feels let down by the federal government," he said.

But, he said, Texas would probably try to head off such problems. "Psychologically, the state would not want to let this thing drag on," Nelli said. "That's why my guess is they will pay off the bonds as fast as they can. The state is not going to penalize the bondholders for what Congress did to them."

George Leung, Moody's managing director for state ratings, said that at first it was a plus for the lease bonds that the state's voters showed support for the project by approving $500 million of general obligation bonds for the collider.

But he said that, in the long run, that vote could be used as ammunition against the lease bonds, since they were not approved by the voters.

The rating officials all emphasized that their high ratings of the lease issue are extrapolated from Texas' double-A credit rating and the state's oft-stated payment pledge.

"Texas is adamant about the fact that they will repay those bonds," said Nelli.

Officials at each agency also said they expect the state to fully or partially redeem or refinance the bonds using its $250 million of unsued GO bonding authority for the project and about $100 million of unspent proceeds. A refinancing would make the question of long-term risk moot.

"I personally think it is highly unlikely those bonds would remain outstanding for 28 years," said Claire G. Cohen, executive vice president of Fitch. She said Fitch was so confident of the bonds' prospects that it never even put the issue under review.

Moody's on the other hand, placed the issue under review on Oct. 21 and acknowledges many uncertainties. Leung said the agency has questions about, among other things, whether the project's partially built facilities can be used in the future, and whether there will be more federal budget cuts.

A group of 11 senators recently announced that they would try to cut $200 million out of the $640 million of close-out funding Congress voted for the project in October. Signs were that state officials might be counting on Congress' generous final allotment for the project in deciding whether to redeem the issue.

Another Moody's official, however, shared the other agencies' confidence. "It's just not Texas' style" to consider a default, he said.

Ciccarone said the position of the rating agencies was understandable, saying they have little choice but to rely on the state's word. "Any lease obligation comes down to a situation of trust," he said.

The municipal bond insurers, for their part, never had much confidence in the issue and have been outspoken about its risks for years.

Neil G. Budnick, senior vice president of Municipal Bond Investors Assurance Corp., said all the major insurance firms spurned requests to insure the bonds when they were issued two years ago.

The insurers believed the bonds carried extraordinary risks.

"The main thing was essentiality. You have this uncertainty with the government funding and it's not possible for the state to keep the project going on its own," Budnick said. If the bottom fell out, he said, the mess would be "very hard to explain to taxpayers."

Budnick said he took some flak for his company's decision not to insure the lease deal, but he doesn't regret it. "I had one Texas official tell me I just wasn't caught up in the excitement," he said.

In light of the collapse of the collider project, several other insurance officials said they were relieved they didn't buy into the considerable hype that accompanied its launch in 1990.

The super collider at the time was a prized project. Texas had just won a nationwide competition to become the host for its 54-mile-long undgerground ring designed to smash atoms into as-yet undiscovered tiny particles and help unravel the secrets of the universe.

But the project's popularity plunged as cost estimates doubled and then nearly tripled, and this year Congress chose to make it the most prominent victim of the budget-cutting fever sweeping Washington.

The federal appropriations, which constituted 90% of the collider's budget at the end, had been the source of the Department of Energy's rent payments for collider facilities that were to be partly built with the bond proceeds. But they never were used to directly repay the bonds.

The state issued the lease bonds as part of its $1 billion contribution to the project to finance ground-breaking work on the collider tunnel.

Even before Congress canceled funding, foreign governments that had promised to contribute $1.7 billion to the project largely failed to make good on their pledges, in what insurance officials said was an early warning sign that things were going wrong.

The offering statement for the bonds discloses the unusual risks. "Among the factors that might adversely affect the willingness of state officials to support or pursue appropriations ... are cancellation of, or a substantial reduction in the funding for, the SSC by the United States government," the statement says, adding "there are no significant remedies available to the bondholders should the legislature fail to appropriate."

First Impression Was of Low Risk Bonds

Despite these early warnig signs, the market's perception of the bonds' risk initially was low, a Texas bond dealer said.

The issue received a robust welcome, trading at prices comparable to the $250 million of double-A rated general obligation bonds that the state had issued for the project only a few months earlier, he said.

"People got caught up in the euphoria of the moment," Lehmann said.

But an officer of a mutual fund with major holdings in the issue said he had qualms this fall when Congress moved to deep-six the project. Keeping track of the developments blow-by-blow through a Washington investment firm, he was searching for buyers at one point, but dropped out of the market because of the deep discount he would have had to offer.

Don O. Karlberg, first vice president of Howard, Weil, Labouisse, Friedrichs Inc., in Houston said the two percentage point spread accorded the bonds at the time of the project's termination probably represents the biggest hit they will take in the market.

Although the bonds came with some major "caveats," Karlberg said he expects everything to turn out well in the end.

"Reasonable people can disagree," Nelli said, but the bonds could not be easily abandoned because they are so "highly visible."

Also, because the bonds have a relatively small debt service of $20 million a year, the savings to the state if it chose to abandon them would be more than offset by its higher borrowing costs, and the damage to its credit reputation and its $10 billion of outstanding state bonds, Nelli and Fitch officials said.

Fitch and Standard & Poor's acknowledged that their assessment may be slanted toward the short term, however, out of the expectation that the bonds will be called.

Nelli said his agency might need to review the issue again if the state does not in fact redeem the bonds.

Leung said Moody's will be watching to see what plans the federal Energy Department and the state develop for using the collider facilities. The agency has until July 1 to come up with proposals for minimizing the project's losses.

"There could be scenarios running the gamut from walking away from it to finding new uses," he said. Alternative uses currently under study include buiding a smaller particle accelerator or using the collider buildings for medical research.

"This is a complicated web of negotiations," Leung said. "It's going to take time to sort things out. But having said all that, there is pressure to get something done soon. The project currently is costing a million dollars a day."Super Collider Bond Credit QualityRatings history for the $250 million of lease revenue bonds issued by the TexasNational Research Laboratory Commission Financing Corp. in December 1991 Initial Rating Actions by Agency Current RatingStandard & Poor's A-minus Reaffirmed rating Nov. 8 A-minusMoody's Investors A put under review Oct. 22 AFitch Investors A not under review ASource: The Texas National Research Laboratory Commission Financing Corp.

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