The city of New York is selling $496.2 million in triple-A rated taxable muni bonds via the Fiscal Year 2005 Securitization Corp. vehicle, a one-off transaction for the city being led by Merrill Lynch.

The bonds being issued are essentially a refinancing of general obligation bonds sold by the city in 1992 that advance refunded bonds it had sold between 1985 and 1991. The advance refunded bonds were escrowed to maturity, though the city expressly reserved the right to call the bonds. "This is basically a restructuring of an escrow account," said a spokesperson at the city's Office of Management and Budget. "These special obligation bonds are backed by U.S. government or U.S. government guaranteed securities in the escrow."

But looks can be deceiving. Despite the word securitization being used to designate the bankruptcy-remote special purpose corporation, sources familiar with the situation hesitate to call it a securitization. Indeed, the investors are all municipal buyers, sources said, and there is no additional credit enhancement on the transaction. It is unclear whether or not other municipalities are exploring this option, and what form future transactions might take.

The 2005 deal consists of three series of bonds comprised of $175.75 million in Series A, $233.1 million in Series B, and $87.4 million in Series C. According to the preliminary statement, each of the three series includes tow term bonds, with the Series A bonds maturing in 2018 and 2019, and the Series C bonds in 2007 and 2018.

After funding the escrow requirements and the annual costs of the corporation, capped at $100,000 under the terms of the indenture, a portion of the bond proceeds, estimated at $43 million, will be transferred to the city, according to a report from Standard & Poor's. There is no pledge from the city to secure these bonds, and no other bonds can be issued from the vehicle while these notes are outstanding.

The city would not specify how much in net present value savings it expects to generate by refunding tax-exempt bonds with a taxable offering. It does not have a benchmark savings rate that it has to meet with the deal.

Michael McDonald contributed to this article

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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