LOS ANGELES A master lease program for Utah debuts today when a state building authority sells $31.7 million of lease revenue bonds without a customary debt service reserve account.

Even though the bonds are being sold without the reserve account. the transaction was structured to allow the Utah State Building Ownership Authority to obtain highgrade ratings from two credit agencies.

The ability to sell the bonds without the extra security provided by a reserve account will generate cost-of-issuance savings for the authority, according to D. Kent Michie. a vice president for Utah's financial advisior Smith Capital Markets. The Salt Lake City-based firm is a division of Zions First National Bank.

Michie said yesterday that he thinks the competitive deal will attract seven bids, reflecting a market demand for Utah obligations.

"There's a rareness factor about Utah paper which is attractive to large funds and investors who want to diversify their portfolios by adding Utah" credits. Michie said.

Utah is rated triple-A by Standard & Poor's Corp., Moody's Investors Service. and Fitch Investors Service. The state has $431 million of general obligation debt outstanding.

Proceeds from the Building Ownership Authority Series 1994A lease revenue bonds will be used to acquire and construct facilities for several state agencies, including the departments of corrections, enVxronmental quality, natural resources, and alcoholic beverage control.

The bonds were rated AA by Standard & Poor's and Aa by Moody's. Fitch was not asked for a rating, Michie said.

Under state law, the authority will issue the bonds, then lease the bondfinanced facilities to Utah, which is the source of payment to bondholders. Lease rental payments that secure the bonds are subject to annual appropriations by the state legislature.

The new state facilities' master lease program allows additional bonds to be issued in the future. Tentatively planned next year is the issuance of $60 million of bonds to build a courthouse in downtown Salt Lake City, Utah Treasurer Edward Alter said.

Michie said one of the most useful features of the master lease program is the opportunity afforded by its legal structure for the lease revenue bonds to obtain high-grade ratings without a debt service reserve fund.

Reserve funds generally are built into lease revenue transactions to provide money to pay debt service if pledged revenues are insufficient.

A typical reserve requirement for a lease revenue bond is an amount equal to 10% of the original principal amount of the issue, Michie said. By not funding a reserve account, the authority obtained an unspecified "out of pocket" savings on its costs of issuance, Michie said.

In addition, the authority will not "have any negative arbitrage worries" because without a debt service reserve fund, "there's no arbitrage to track," Michie said.

Rating agency analysts said yesterday that a handful of states recently have issued lease revenue bonds without creating a debt service reserve fund.

However, Chris Irwin, a managing director for Standard & Poor's, said it would be "misleading" to conclude that this marks the beginning of a trend.

"We can't make a blanket statement" that states are issuing lease revenue bonds without debt service reserves, Irwin said. "It depends on state law and how [the issuer] structures the lease payments."

Utah's lease revenue bond issuance without a debt service reserve fund "highlights the strength of Utah as a credit," said Robert Kurtter, a vice president for Moody's. The Moody's Aa rating reflects Utah's "conservative fiscal policies ... [and its] obligation to pay debt."

States that have issued lease revenue bonds without debt service reserves include Missouri, Ohio, and Pennsylvania.

Under Utah's master lease program, bonds are "cross-collateralized" -- meaning if the legislature fails to appropriate money for any one facility, the trustee may take possession of all facilities -- then sell or relet them for the benefit of bondholders.

Utah structured the payment dates to bondholders in a conservative fashion. Holders are paid each Nov. 15 and May 15, while the legislature is required to appropriate the money by the end of its annual session, usually late February.

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