O.C. FINANCIAL CRISIS : Bondholders Refrain From Panic Selling : Reaction: No one is dumping securities yet, but many are nervously checking on safety of their assets. Buyers keep hands off despite municipal bond rally nationwide.
Nervous owners of Orange County municipal bonds refrained from panic selling Friday but flooded phone lines of brokers and mutual funds to check on the safety of their holdings following disclosure of a $1.5-billion dive in the value of a county-managed investment fund.
Meantime, potential buyers of Orange County tax-free securities kept hands off even as the overall market for municipal bonds nationwide continued a weeklong rally. Orange County bond prices fell slightly.
Fidelity Investments in Boston, the nation’s largest mutual fund company, was inundated with calls from concerned investors Friday, according to Jack Haley, portfolio manager for the California municipal bond funds. Haley said Fidelity’s $700-million portfolio should not suffer any loss, because it includes only 10 Orange County bond issues valued at $35 million.
“All of our exposure was insured Orange County bonds, so our exposure was minimal,” Haley said, adding that Fidelity managers may soon request a meeting with Orange County officials.
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Mutual fund operators Scudder, Stevens & Clark Inc. in Boston and T. Rowe Price Associates in Baltimore said they did not expect their California tax-free bond and money-market funds to be hurt, because each has 1% or less of its assets invested in bonds issued by the various Orange County agencies.
“It’s kind of inconceivable that the debt could go into default,” said Bernie Schroer, California bond fund manager for Franklin Templeton Group of Funds. “But nobody really knows what to do right now.” Schroer said the San Mateo firm’s $13-billion California bond fund holds only $18 million worth of Orange County debt.
Investors buying municipal bonds directly called their brokers to express fears and seek counsel.
“I will not buy any more Orange County municipal bonds after this whole thing,” said retiree Jack Brownstone, a bond investor who lives near Palm Springs. Brownstone said he plans to hang on to the $15,000 of Orange County bonds he owns.
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Bond traders and managers of tax-exempt mutual funds said few Orange County bonds traded Friday--with virtually no buyers available.
“People are just sitting tight and holding on,” said Robert Gore, a bond trader with Crowell Weedon & Co., an investment bank in Los Angeles.
“Outside of Orange County, the market is completely at ease,” said Jeremy Ragus, who manages the California tax-exempt bond fund of Scudder, Stevens & Clark Inc. in Boston. For the rest of the municipal bond market, one major index climbed about $12.50 for each $1,000 of the bond face value.
Orange County bond prices dropped slightly, about $5 for each $1,000 in value, on concerns that county investment losses could harm individual government agencies and inhibit their ability to make payments on their bonds.
Orange County bond owners received more troublesome news late Friday. After the market closed, the Standard & Poor’s Corp. credit rating agency said it had put Orange County bond issues on a credit watch. This move typically comes just before a credit rating is downgraded--which leads to higher borrowing costs--and is expected to hurt prices of Orange County bonds on Monday, bond traders said.
Merrill Lynch & Co., which has extended $2.5 billion in credit to Orange County to purchase securities, held a telephone conference with more than 30 major bond holders to assure them that the individual bonds are secure.
Bond experts said there is no immediate impact on the values of the various municipal bonds sold by the scores of agencies tied to the Orange County investment pool or their ability to make bond payments. However, they noted, any panic by participants in the pool--including the Orange County Transportation Authority and all the county’s school districts--could force county Treasurer-Tax Collector Robert L. Citron to sell the portfolio’s holdings at a painful loss.
Many individual investors are concerned that if the county investment pool’s losses increase, those government agencies involved may have difficulty getting cash to pay repay interest and principal on their debts. Still, some investors seemed unruffled.
“We’re not going back to the 1930s. Over the long term they will pay off,” said Louis Ballas of Newport Beach, a longtime investor in Orange County municipal bonds.
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More than 180 cities, schools and water districts, and other agencies use the county’s investment pool--now valued at $18.6 billion--to invest their surplus funds and bond proceeds, reaping generally high returns until this year when rising interest rates hammered values of the complex securities known as derivatives that make up part of the pool.
Now critics are questioning Citron’s handling of the county’s investment portfolio, particularly his risky strategy of using derivatives, which are based on the value of an underlying stock, bond commodity or index.
“When you are dealing with money from states, cities and communities, it should be handled conservatively,” said Joe Deane, a California bond fund manager at Greenwich Street Advisors, a division of investment banking firm Smith Barney in New York.
Times correspondent Hope Hamashige in Costa Mesa contributed to this report.
