Washington Officials Remember Vendor Deal As a Leasing Nightmare
People in Washington State recall the incident like a bad dream.
The Vanguard Group wanted to know why the state would not complete payment of its 1986 certificates of participation. In fact, the $80 billion investment fund manager, the principal holder of the lease issue, was threatening to blacklist the state.
But no one in the state treasurer's office knew anything about the issue.
Underlying the $9.3 million deal was a master lease contract for computer equipment that state data processing officials had negotiated wiht Public Leasing Corp. of Oklahoma City in 1985.
The officials, who had little experience with public offerings, authorized selling the lease as securities, and underwriter Clayton Brown & Assicuates if Chicago gave investors offering documents that looked like Washington's own. But state finance officials were never told about the deal.
A problem arose when the data processing agency decided to exercise its right to prepay the lease contract in 1988, two years before maturity. The players in the deal underestimated the amount owed and did not uncover the blunder until the nex year.
The miscalculation had created a $1 million shortfall in the funds available for the final payment to certificate holders in December 1990. The trustee, the Bank of Oklahoma, duly notified investors that it would not be able to complete payment, and Vanguard placed an outraged call to the Washington treasurer's office.
"It really stunned people here," said a Washington bond attorney with knowledge of the incident, who asked not to be named. "The state feels strongly about complying with the rules and living by its word, and this made it look like it had willfully decided not to pay its debts."
After uncovering the problem Washington officials sought to limit damage by taking responsibility for the issue, even though the state had fulfilled the lease contract to the best of its understanding. They worked with the trustee bank and leasing company to ensure enough funds were on hand to make the final payment to Vanguard and other investors, said David Walsh, an assistant state attorney general.
That meant paying more than the lease originally called for, but state officials said it was necessary to protect their name and credit standing.
According to assistant state Treasurer Lyle Jacobsen, "The thing the state was most concerned about was the failure ot communicate when the bank and Public Leasing became aware there was a significant gap in funds available to make remaining payments.
"The matter should have been brough to our attention immediately, but instead it went on for a very long time," he said.
Mr. Walsh attributed the problem to administrative blundering and not illegal activity.
The Washington bond attorney raised questions about the disclosure practices and business practices of the firms involved.
Public Leasing, a wholly owned subsidary of the Sac and Fox Indian tribe of Kansas that in the last year went out of business, was a the very least "disorganized" in its handling of the issue, the attorney said.
And while the disclosure documents circulated by Clayton Brown "didn't out and out lie about their relationship with Washington State," they nevertheless "created enough problems that the state decided to take matters into its own hands" and centralize all future lease deals within the finance office, the attorney said.
"It turned out to be an awkward situation when the official statement gave every appearance of being authorized by the state. That's where the real rub is. The market thinks the state of Washington must have done this deal, even though it was done entirely by a third party," the attorney said.
Wayne Pierce, the Clayton Brown vice president in charge of the deal and the firm's leasing group, did not return phone calls. Neil Hertenstein, a vice president at the Chicago Corp. who worked on the deal when he was previously at Clayton Brown, said he could not recall the details.
Tom Langdon, an officer of Public Leasing, insisted that the deal was legitimate and that the certificates were authorized by the officials who negotiated the lease contract for the state data processing agency. He acknowledged that the pariticipants never contact the finance office.
Dealers Fear Issuers Will Try to Take Control
Mr. Hertenstein said the reason leasing companies often issue certificates without first seeking authorization from a state's finance office is they are afraid of being turned down or becoming junior partners.
"In most cases, if you went to an issuer and said you were going out with a public offering, they may say, 'well, we want to get the finance people involved,' and you would lose control of the deal," he said.
Mr. Walsh said that while the securities sale was authorized by the data processing agency, when problems arose with the deal, the computer agency did not "have the staff or the expertise to handle it like the treasurer's office."
The Washington bond attorney was more pointed. "Those guys wouldn't know a COP or a bond if it hit them in the face. They had no proper knowledge about finance and securities and weren't aware of the slick operators out there," the attorney said.
Sally Rutherford, vice president of Standard & Poor's Corp., said problems with vendor lease deals often stem from lack of coordination between a state's top finance officers and the low-level officials who negotiate the contracts.
"Ther may be language in the contract that indicates the vendor intends to obtain public financing, but that is lost on the people authorizing the deal. They just may not realize that there would be public issues that would upset the bond officers," she said.
While no laws may be broken she said the agency still insists on getting authorization from top finance officials before it will rate such an issue.
The security of any lease offering is based on the government's willingness to continue appropriating payments for the lease, and that would be particularly in doubt if finance officials objected to the issue, she pointed out.
Because of the problems with lease financings authorized at low levels, more and more issuers besides Washington have been taking a hard look at putting their finance offices in control of all public lease issues, she said.
Other issuers, such as Florida, have given control over equipment lease financings to the same office that manages the state's vendor lease transactions and master equipment leasing program.
In Florida, it was the controller's office and not the state's bond finance division that sponsored two of the largest master equipment lease deals in history: a $475 million offering in 1986 and a $222 million deal last fall.
Despite some problems with vendor lease deals, Florida official reports satisfactory results with the arrangement.
Like Washington, Florida experienced difficulties with contracts it negotiated with Public Leasing that were later sold to investors and that came to the state's attention because the investors complained to the state about missing payments, said Stanton Beazley, a state auditor.
In one of the deals, the state found Public Leasing failed to pass through lease payments on a state university installment purchase contract that had bee sold to a retired professor. The payment disruption was apparently due to turmoil surrounding the company's demise, he said.
Mr. Langdon and other Public Leasing officials could not be reached for comment on the Florida deal. Jim Shaw, the company's president, stated in response to an inquiry from Dunn & Bradstreet last year that the company discontinued operations with an undetermined amount of outstanding debt. It has not filed for bankruptcy, according to an Oklahoma bankruptcy clerk.
Shawn Abernathy, a former Bank of Oklahoma trustee who oversaw the Washington deal and several other Public Leasing deals, said the firm appeared to "disappear off the edge of the earth" and "all sorts of problem cropped up." Ms. Abernathy said she was not aware the firm had actually missed payments to Florida investors. But since it had often served as the loan servicer on its lease deals, she said. just before the firm closed, there were cases where it stopped sending invoices to customers.
"It led to a lot of running around. You had to turn into a detective to find someone to talk to in the company who was knowledgeable about the financings," she said.
Mr. Beazley said Florida took a pragmatic approach to the Public Leasing problems. To remedy the retired professor's complaint, the state ascertained that he had received legal tilte to the lease payments and started to make the payments directly to him, he said.
Carl Barber of the controller's office said the state ha s "satisfactory" experience with Public Leasisng when it was in charge of the state's malster equipment leasing program in 1986 and helped put together its massive $475 million certificates of participation issue.
After that offering and until last fall, the state financed all of its leases through private vendor transaction and placed quite a few with Public Leasing, he said. "There were a few problems, but I don't think there were any more problem with Public Leasing than with other vendors doing the same type of thing," he said.