L.A. County Will Borrow $100 Million From Japanese

Called the first such foreign deal by a local government body, Los Angeles County officials signed an agreement this week to borrow the equivalent of $100 million in yen from two private lenders in Japan, county officials reported Wednesday.

“This is our first borrowing in a foreign market and the first state or local government borrowing of this nature,” county Chief Administrative Officer Richard B. Dixon said. Speaking by telephone from Tokyo, Dixon added: “We have been shopping for opportunities in the taxable market, and this is the first and best opportunity we have found.”

Dixon, who is in Japan this week with County Counsel De Witt Clinton and Treasurer-Tax Collector Sandra Tracey, said the county will borrow $100 million in yen for 10 years under the arrangement with the Nippon Life Insurance Co. and the Long Term Credit Bank of Japan Ltd. Executives familiar with the transaction said the Japanese end of the deal was purely private, with no Japanese government backing for the loans involved.

Currency Swap Agreement

The county will invest the funds in “high-grade debt securities,” such as bonds issued by savings and loan companies, which are considered safe because they are backed by home and business mortgages. The profits would be used to help reduce the unfunded liability in the employees’ retirement system, Dixon said. A currency swap agreement will also allow the county to repay the loan in dollars rather than yen as a hedge against any risks if the foreign currency fluctuates, Dixon added.

The transaction, which has been nearly a year in the making, comes as the county seeks alternatives to the domestic market after Congress eliminated local government’s ability to issue tax-exempt pension bonds under the 1986 Tax Reform Act.

Also favoring the Japanese loan, Dixon said, were lower interest rates. He said the county loan will be repaid in dollars at the 10-year U.S. Treasury note rate, now 9.01%, plus .58%. At today’s rates, these percentages are lower than the domestic market rate of about 10%.

Ties With Pacific Rim Countries

Armed with the Board of Supervisors’ authority to seek as much as $500 million to finance part of the county’s unfunded retirement liabilities, Dixon said that, besides loan costs, the logical financial market to tap was Japan.

“Los Angeles’ cultural and economic ties are predominantly with the Pacific Rim countries and at this time, our ties are perhaps more with Japan than with any other country,” Dixon said.

Tracey also said that the loan agreement will help Los Angeles obtain exposure in Japan and the global capital market.

Originally, Los Angeles County officials had explored the Japanese bond market in hopes of raising investment funds but turned their attention to the private loan arrangement when that proposal was raised by First Boston Corp., the New York-based investment banking firm that served as financial adviser in the transaction.

However, Sharon Yonashiro, director of the county’s public finance program, said county officials still intend to look at the possibility of making a public offering of Los Angeles County bonds in Japan. They are also considering entering the European and Japanese markets to buy bonds to raise the additional $400 million to lower the unfunded liability in the employees’ retirement system.