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District of Columbia Gets Bids for Loan Guarantees

December 17, 1994

WASHINGTON (AP) _ The District of Columbia got an early Christmas present Friday in the form of two offers to help the city stay solvent next year. But only one bid actually covers the amount the city needs now.

Few details of the proposals were revealed at a news conference Friday by Mayor Sharon Pratt Kelly, incoming Mayor Marion Barry, City Council Chairman Dave Clarke and financial officials.

But D.C. Treasurer Maria Day-Marshall said only one of the proposals to offer a ″letter of credit″ - a bank loan that guarantees bond payments are made on time - was enough to cover the proposed sale of $250 million in notes the city will conduct later. The amount the other bidder promised to underwrite won’t be revealed until next week.

The letter of credit was necessary because, with the city’s poor credit rating, securing a loan to underwrite its notes would be difficult, and the interest which the city would be charged would be high.

Nevertheless, Kelly called the response ″spectacular.″ She would not identify the investment banks which sought to do business with the city.

″All applicants are solid financial institutions, with major practices in the municipal markets,″ she said. ″Having the credit enhancements of these two major institutions means that we ought to be able to get good terms.″

Both Barry and Clarke said the proposals offer only a temporary reprieve. ″We can take a moment of relief from it,″ Clarke said. ″But I don’t think we can take much victory, because we still have a struggle ahead.″

The city’s chief financial officer, Ellen O’Connor, said the city would choose a lender based on several factors, including credit worthiness, fees for service, and other terms it requests of the city.

City officials plan to offer investors $250 million in notes the week after Christmas. Investors who purchase the notes will have a slightly reduced risk because the letter of credit would act as insurance of timely payment and interest. Also the notes have a short maturity and are scheduled to be paid back in September.

Without the $250 million note offering, the city could run out of cash by the end of January.

O’Connor said the cost of the loans, including interest and closings costs, is expected to be no more than $10 million. ″The final cost of all of this borrowing is determined the day the sale is actually made,″ probably Dec. 28, O’Connor said.

City financial officials said one proposal for the letter of credit was made by an international bank and the other came from a syndicate of five domestic and international banks, both of which had strong credit ratings.

Robert Craft, partner at Sullivan and Cromwell, a Wall Street law firm specializing in corporate finance, said the cost of the letters of credit depends on the amount of risk in lending to the District of Columbia. ″Investors have to feel that they’re adequately compensated for taking the risk.″

Standard & Poor’s, which had previously rated the district’s financial outlook as ″negative,″ earlier this week flagged the city with a ″credit watch,″ warning the market of possible future downgrade of the city’s bonds.

The city’s financial struggle has affected nearly every service provided by the its government.

For example, police officers on Friday warned that budget cuts proposed by the police department would worsen crime in the city, hastening the flight of the middle-class tax base and hindering economic development.

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