WASHINGTON - Tax-exempt vendor lease offerings, which are a small but apparently growing segment of the leasing market, may be the next Achilles heel for municipal issuers and investors.

The potential problem with vendor lease offerings, detailed in a comprehensive two-part series reported by Patrice Hill that appeared in The Bond Buyer last week, comes because a growing number are being sold to the public without the knowledge or participation of municipal issuers.

If the practice of selling unauthorized lease offerings gets out of hand, both issuers and buyers could get burned.

As the series pointed out, Los Angeles County had to pay a higher interest rate to sell an equipment lease because it went to market after a vendor deal, derived from an L.A. County modular building lease for juvenile dormatories, hit the market about the same time at a much higher rate.

Worse yet, L.A. County did not even know the lease had been securitized and sold.

The vendor deals, which are increasing in popularity because they carry high yields, carry potential risks for investors and raise serious questions about disclosure practices.

The risk comes, in part, because buyers have no assurance that the government or agency making the lease payments will stand behind the deal if it was not told the deal was sold to the public and if various middlemen lose track of the lease payments or create other problems.

Investors, attracted by rates that often equal taxable rates, also run the risk of being mislead by offering statements that often appear to violate disclosure standards.

Many vendor lease offerings feature the phrase "direct obligation," which has no legal meaning or force, and which may mislead the investor to believe the offering is virtually equivalent to a general obligation bond. Some offering statements, which are designed to look as if they were prepared by the government, imply the "issues" are approved obligations, when the only thing the government approved was an appropriation that could subsequently be rescinded. They also often contain either outdated or irrelevant financial statements.

Governments need the flexibility of making small purchases through lease financings, but must make sure investors are protected, the offerings are coordinated, and proper disclosure standards are met.

The solution is better management of this emerging product, both by governments and the packagers of offerings.

States need to prohibit unauthorized sales of leases and require firms to get written permission before issuing COPs based on any lease agreement or providing any offering statements.

But firms need to make sure the governments know and approve of the offerings and go to extra lengths to explain the intricacies to investors.

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