N.J. financing program will cut costs for small bond issuers

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Nov. 20, 2000 (Thomson Financial Media)—The New Jersey Economic Development Authority on Wednesday will sell $21 million in bonds as part of the first pooled municipal financing in the state designed to serve small municipalities and those without a county economic development authority.

The deal, which many hope will be the start of a regular program, brings together six small towns that normally issue notes or pay the higher costs associated with being a small town and issue only about $1 million in bonds in a typical offering. Their needs are universal to towns across the state: fire trucks, new municipal buildings, and sewer repairs.

"We have been trying to move to a long-term debt service, but it was going to cost a lot," said Ronald Sworen, the mayor of Frenchtown, a community of about 1,600.

"We would have had to get insurance because we are so small, and that would really add to the costs," he said. "This way, we benefit from the other towns."

The projects and the strengths of the individual towns led Financial Security Assurance to insure the deal, a process that involved taking a detailed look at six towns that never carried ratings before. This will provide the deal with a triple-A rating. Moody's Investors Service will also provide an underlying rating.

"When we look at a credit pool with no cross-collateralization we have to be comfortable that each is investment-grade," said Suzanne Finnegan, chief municipal underwriting officer at FSA. "You have to look more carefully at smaller issuers, and we did look at this deal extra hard. These credits are brand new to us."

The fact that each town will be responsible only for its own portion of the debt was very important in setting up the structure of this transaction. According to Frank Mancini, the managing director of investment banking for the EDA, the program has several layers of security that can only help the bonds.

Each issuer had to go through their local approval process, and then to the state's Local Finance Board before they could apply for the pool. The finance board acts as a check, making sure that the town has a manageable debt burden and the projects are worthwhile.

After the local approval process was finished and the finance board approved the projects, it was up to the EDA to review the applications and approve participation in the pool.

The cities will not only get the benefits of a pooled EDA offering in the primary market. Mancini believes that the EDA's large presence in the secondary market will help these bonds trade and give a name-brand recognition to otherwise little-known towns.

"We cover the entire state, so we are well-positioned to handle this type of conduit issuance," said Mancini. "We are also one of the top-ranked municipal issuers in the country, so our name carries a lot of credibility in the market."

According to Thomson Financial Securities Data, the EDA in 1999 was the eighth most active issuer in the country. It has fallen to 107th so far this year.

Because the pool was going to issue the debt this year, the localities had to prepare for their first debt service payment appearing on the next fiscal year's budget. This frightened some of the interested municipalities, who decided to wait until the next cycle of this program before participating.

According to David Thompson, a senior vice president at Commerce Capital Markets, about 60 of the 566 mayors in the state were interested in the program this first time. Of those, about 15 filled out applications, but some dropped out of the pool because of the immediate debt service payments.

"The biggest obstacle we had was the towns having to make the difficult decision to enter into this and have to make payments on debt service that will go on this year's tax rolls," said Thompson. "The deal went from $10 million to $40 million and a couple of things in between before we finally settled it all out."

Since this was a new program for the EDA and the underwriter, Commerce Capital, putting it together took about 18 months. The New Jersey Conference of Mayors had broached the idea with a few people and found an interested party in Gil Sanders, a managing director at Realvest Securities Corp., who served as the deal's financial adviser.

The goal of the program was to create a financing vehicle that filled a unique niche in the state, according to the EDA's Mancini.

"We were very sensitive to the fact that we did not want to create a program that would interfere with any other type of financing program," said Mancini. "We wanted to fill a gap for smaller communities that didn't have access to the capital markets and those communities in counties that don't have improvement authorities."

The Conference of Mayors did three road show presentations, inviting the state's mayors to attend. Some of the mayors who attended brought the information home to their chief financial officers. Gene Marie McCartney, the chief municipal finance officer for Blairstown, received her first glimpse of the program this way. She had been using bond anticipation notes to finance capital projects, rolling them over with more Bans instead of issuing long-term debt.

"We had been issuing bond anticipation notes to finance our projects because the cost of debt was too high. But when I received the information on this and saw how much it could save me, I filled out the application," said McCartney.

Saving money with the economies of scale offered by a pooled financing is the reason this program was created, according to everyone who had a hand in arranging it. But getting the initial deal off the ground took long hours in the car traveling from municipality to municipality and even longer hours organizing the six separate sets of papers submitted by the participating municipalities. Thompson believes the program is on its way now and if this initial offering is successful, doing it again won't be as difficult. Next year, he hopes the program will serve even more issuers, including those that weren't ready to commit this year. Thompson also believes this sort of pool can work in other states.

Sworen said Frenchtown would likely participate in the pool again in three or four years, when the town needs to issue more bonds.

Another benefit of the program, according to Dan Faurrbach, the executive director of the New Jersey Conference of Mayors, was that mayors had a chance to see what was involved in bringing a deal to market. He said he was amazed at how many people were involved in a bond sale. He also thinks that as mayors understand these things better, they will be more eager to take advantage of the program.

"I think that once this deal happens, mayors across the state will hear about it and want to participate," said Faurrbach. "This is only the first inning of a very long baseball game." Copyright c 2000 Thomson Financial Municipals Group. All Rights Reserved. http://www.bondbuyer.comThomson Financial is a leading worldwide provider of e-information. To subscribe or see more: www.thomsonfinancial.com.

Copyright, Thomson Financial, [2000] All Rights Reserved.

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