CHICAGO - Milwaukeelast week closed on its first commercial paper sale, a $75 million that captured rates of under 1%, in a deal driven by the city's effort to increase its floating-rate exposure and better manage its cash flow for capital spending.

The rate surprised the city's finance officials, who on initial pricing discussions were offering the securities that ranged from 30-day to 270-day maturities in the 1.15% range. The transaction was initially oversubscribed, with 17 firms interested in purchasing all the paper. In filling orders, the city lowered the interest rate to between 0.90% and 0.95% and distributed it among 14 firms that submitted final orders.

"I was amazed. In my 20 years I don't ever remember getting that kind of rate for a maturity up to eight months out. We were elated. Maybe the insurance problems worked the other way for us," said Michael Daun, deputy to city Comptroller Wally Morics, whose office manages Milwaukee'sdebt.

The commercial paper carries a letter of credit from State Street Bank & Trust Co., which carries top short-term ratings. Citi and Loop Capital Markets LLC are the dealers on the paper program. Part of officials' surprise came not just from the strength of investor interest or the better-than-expected rates based on current short-term indexes, but also because of the higher rates in the 1.7% to 1.83% range the city has been paying on its variable-rate demand obligation bonds.

The latest remarketing on the $25 million floating-rate issue from 2005 is today. Bank of America is the remarketing agent on the bonds that have captured rates at its weekly remarketing in line with the Securities Industry and Financial Markets Association index. The bonds carry a standby bond purchase agreement from State Street.

Aside from the surprise for Milwaukee officials, the differential on the interest rates presents a snapshot of how the credit problems stemming from the subprime mortgage market collapse are affecting demand in the short-term municipal market. Market participants attributed the spread between the markets to the absence of enhancement from the monoline bond insurers in CP market.

Despite the difference in its VRDO and CP rates, Milwaukee hasn't experienced the same struggles in recent weeks as have other issuers holding VRDOs that in some cases have spiked. That's because the city's VRDOs don't carry insurance.

Milwaukee's public debt specialist, Richard Li, had looked at establishing a commercial paper program for the last couple of years as a means to better manage the city's cash flow on its capital program. The city also wants to increase its floating-rate exposure in its overall $700 million general obligation portfolio.

Between the commercial paper issue and the $25 million sale in 2005, Milwaukee has about $100 million of unhedged floating-rate exposure. The commercial paper program has a total authorization of $125 million.

"We've been a traditional fixed-rate issuer for a long time, but want to move towards a 75-25 split," Daun said. "This program also gives us more flexibility to finance our interim needs."

Aside from garnering a favorable interest rate on its initial CP issue, Milwaukee also benefited from securing from State Street a commitment to back up to $150 million of floating-rate debt as part of its planning on the 2005 deal. Officials believe the city would have paid as much as double the 17 basis points it now is paying if it had more recently applied for the bank protection which runs through 2012.

Milwaukee early next month will issue its annual revenue anticipation note sale - about $70 million - and an additional $50 million of fixed-rate GOs in a competitive sale. Finance officials are interested to see how the market receives the bonds, given the city's double-A credit.

In recent years, most winning bidders have opted to purchase insurance on Milwaukee's GOs. The city's GOs are rated AA-plus by Fitch Ratings, Aa2 by Moody's Investors Service, and AA by Standard & Poor's. q

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