DALLAS -- The Texas Water Development Board yesterday won state approval to amend the bank agreement for its $54 million variable-rate state revolving fund program in a move expected to save $271,000 a year.

The change was unanimously approved yesterday by the Texas Bond Review Board.

The agency plans to amend its three-year agreement with Canadian Imperial Bank of Commerce to provide only liquidity services and to discontinue the credit enhancement arrangement first initiated in March 1992.

The change in the bank services agreement is expected to be completed by mid-July when J.P. Morgan Securities Inc. completes a schedule remarketing of the variable-rate bonds that will put the new, liquidity-only arrangement in place.

Under the existing agreement with Canadian Imperial, the bank is responsible for paying monthly debt service on the variable-rate bonds and for purchasing any of the debt that cannot be remarketed. The Water Development Board has to reimburse the bank on the same day that debt service is paid and pay debt service on any debt that is not remarketed.

The change approved yesterday will make the bank responsible only for providing liquidity for bonds not remarketed.

State officials said the change could result in annual savings of up to $271,875 for as long as the state revolving fund program is continued. However, officials have estimated one-time conversion and remarketing costs of $231,500 in order to change to the liquidity-only agreement.

"We'll recoup that in less than one year." said Kevin Ward. a staff member at the Water Development Board.

Under the current bank contract, Canadian Imperial is paid a yearly fee of 0.40% of the commitment amount, which is currently $54.3 million. With the new agreement, the bank would be paid 0.175% on outstanding variable rate bonds and 0.125% for the unused portion.

Texas officials have begun informal discussions with Moody's Investors Service and Standard & Poor's Corp. about the ratings implications of the change, but do not expect the credit quality of either the revolving fund long-term program or the variable-rate program to be affected.

Under the existing agreement, investors and analysts look to the rating of Canadian Imperial to determine the underlying credit strength. The bank has a long-term rating of Aa3 from Moody's and AA-minus from Standard & Poor's.

"They should be able to maintain the ratings," said Jim Thomassen, executive director of the Bond Review Board.

In a summary presented to the board, state officials speculated that the long-term rating of the revolving fund program under the new agreement will be A1 from Moody's and AA-plus from Standard & Poor's. Ratings analysts declined to speculate on possible ratings.

The move to drop the credit enhancement agreement comes as lawmakers consider a bill that would allow the Texas Treasury to provide liquidity for obligations issued by state agencies. The legislation, H.B. 1608, passed the Texas House last week and is pending before the Senate.

Deputy Treasurer John Bell said he expects the bill to pass, but said the Treasury has yet to determine how the program would work and which state agencies might benefit. Officials have estimated that the state general fund could save as much as $250,000 by giving issuers an alternative to private liquidity facilities.

He said the cost to state agencies to use the Treasury program would be nominal.

"We don't have a set policy yet on how this would work," Bell said. "We may only provide liquidity to start with for bonds that are paid out of [state] general revenue. We just don't know."

Dan Black, fund manager for the Texas Water Development Board, said he would be interested in any program that could further reduce the cost of providing capital for local water projects, as the agency does.

"We Just don't know about this program until the bill passes," he said. "We will look at it."

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