O.C. Takes Giant Stride on the Path to Solvency

Clearing a major hurdle Tuesday in its efforts to emerge from bankruptcy, Orange County obtained insurance and earned top-notch ratings from Wall Street for an $800-million bond issue.

The county is pledging the bulk of its real estate assets as security for the offering, which will enable it to repay all of its obligations to bondholders, vendors, most other creditors and come out of bankruptcy by July.

The insurance, which guarantees that the bonds will be paid off in full at maturity, is expected to entice more Wall Street investors to buy the bonds, and save the county $100 million in interest costs in the process, the county said.

“We’re in the 24th mile of a 26-mile marathon and these last two miles are going to be the toughest,” said Christopher Varelas, a Salomon Bros. vice president and the county’s lead financial advisor. “But our best scenarios are coming to fruition. It’s the culmination of minor miracles,” he said.

Orange County officials said MBIA Inc., a major insurer of municipal bonds, has agreed to back the $800 million in financings. It would be the largest single U.S. municipal financing ever insured by MBIA.

Although the county did not divulge what it will be paying for the insurance, sources said the county will pay about $35 million, about three times the market rate. That estimate includes MBIA insuring the $800 million and an additional $120 million in pension refunding bonds, sources said.

“Obtaining insurance . . . is a major step in completing the financing necessary for the county to emerge from bankruptcy,” said Jan Mittermeier, the county’s chief executive officer.

Orange County filed for bankruptcy in December 1994 after former County Treasurer-Tax Collector Robert Citron lost $1.64 billion in his ill-starred bets on interest rates. Citron has pleaded guilty to six felonies in connection with the bankruptcy and is scheduled to be sentenced later this week.

The insurance earns the county triple-A credit ratings on the debt from Moody’s Investors Service Inc. and Standard & Poor’s Corp., analysts said. But even without the added guarantee of insurance, county officials said that they expect to be awarded investment grade ratings from Moody’s later next month, further reducing borrowing costs and confirming the county’s progress in restoring its fiscal health.

The county’s credit rating was downgraded to non-investment grade by both Wall Street credit rating agencies after the county filed for bankruptcy protection and posted the massive loss.

“The [planned offerings are] a superb deal. It’s well-planned and well-structured,” said John S. Pizzarelli, manager of MBIA’s Tax-Backed West Department, who said the insurer was impressed with the county’s efforts in 1995 to emerge from the largest municipal bankruptcy filing in U.S. history.

Pizzarelli said the offering’s structure was strong. The county is pledging its real estate, including the Hall of Administration, jails and golf courses to secure the deal. The state is setting aside money earmarked for the county in order to pay off the bonds, and Orange County received a commitment by the state Legislature not to reduce that revenue.

“Orange County has had an astonishing turnaround since last year,” Pizzarelli said. “We were very impressed with CEO Jan Mittermeier and the county’s move to cut its budget. It’s evident that they are willing to do the right thing.”

This is not the first time MBIA involvement has helped secure an Orange County bond deal. Last May, the county’s purchase of MBIA insurance was sufficient comfort to investors for them to purchase $279 million of recovery bonds. Those recovery bonds provided desperately needed cash to school districts and other municipalities that suffered losses in the county’s investment portfolio.

The county paid at least $9 million for that insurance--about four times the going rate--but still had trouble attracting wary Wall Street investors to its bonds.

Last June, MBIA expressed misgivings about the county after voters rejected a sales tax hike. “We would have to look very, very, very hard at any bond from Orange County in the future,” said Neil Budnick, a senior vice president at MBIA.

But widespread rejection from a nervous Wall Street is unlikely this spring, analysts said, because the county has a recovery plan in place that illustrates the county’s commitment to make good on its debts to bondholders and other creditors.

“This guarantees Orange County market access,” said Jon Schotz of Saybrook Capital Corp., a consultant to the committee representing participants in the investment pool. “I don’t think there will be a boycott by buyers. There will be plenty of people stepping up to the plate this time.”

Rating analysts agreed that the insurance will allow Orange County to sell its bonds.

“This insurance guarantees a triple-A rating and market access,” said Barbara Flickinger, assistant director with Moody’s Investors Service.

While Flickinger would not confirm that an investment grade rating was in the works, she acknowledged the county has addressed most of the rating agency’s concerns.

“We are confident we are going to receive an investment grade rating on the bonds from Moody’s even without the insurance,” said Varelas. “This helps the county recover its credit rating.”

Still, despite the high marks, the relationship between the county and its rating agencies has the potential for conflict.

Orange County has sought to deflect blame for the devastating collapse of its investment pool, arguing that it relied on the expertise of the two rating agencies that gave high marks to more than $1 billion in notes and bonds that were used to gamble on risky securities.

But while Orange County has sued brokerage and accounting firms, it did not name either rating agency as a litigation target in its recent court-filed plan of adjustment.

Still, the document does say that “all brokers, dealers, attorneys, financial advisors and other professionals who have dealt with the county are hereby on notice that the county expressly has reserved the right to pursue pool-related litigation against them.”

County officials said they could not comment on the likelihood of suing the rating agencies.