ORANGE COUNTY IN BANKRUPTCY : For Bond Sellers, a Day When Nobody Wanted to Buy : Securities: Even routine trades fell through. It’s not clear how the county’s filing will affect the market today.
Investors nervous over Orange County’s growing financial crisis on Tuesday tried to unload bonds issued by the county and its municipalities, only to find that no one wanted them.
Even routine trades flopped. Orange County Sanitation Districts, for example, could not find a buyer for $4 million worth of its notes--basically interest-bearing IOUs--as it tried to complete a scheduled refinancing of the paper, said Steve Kozak, the district’s financial manager.
It was not immediately clear how the county’s decision late Tuesday to file for Chapter 9 municipal bankruptcy would affect the market for Orange County muni bonds.
In general, on Tuesday before the bankruptcy filing, the offering price of Orange County munis was down 12% to 15% compared to bonds with comparable yields and credit ratings, as would-be sellers offered discounts of an additional two to three percentage points from Monday’s prices in fruitless efforts to make deals.
While uncertainty about the county’s situation kept its bondholders and bankers on edge Tuesday, the overall bond market had a strong day as traders grew optimistic that the Federal Reserve Board has raised interest rates enough to flatten inflation.
Bond yields fell to continue a weeklong rally in market prices. As yields fall, bond prices rise. The market’s benchmark, the 30-year Treasury bond, gained $5.31 per $1,000 in face value as its yield fell to 7.87% from 7.92% on Monday.
“Everyone is scrambling; we’re under pressure to find (Treasury) bonds” to satisfy heavy demand, said Rissy Mell, a trader at Josephthal, Lyon & Ross in New York.
One trader said that conflicting rumors and reports about the Orange County situation “continue to foster a misinformed market” for those bonds, however.
One result, he said, is that “there has been a load of Orange County bonds up for bid” and no one interested in buying them.
It isn’t only large institutional bondholders that are asking questions that so far have no answers.
“What does it mean?” bemoaned retiree Jack Brownstone, a Rancho Mirage resident who owns about $15,000 worth of Orange County bonds. “What happens to the value of my bond? Is it like when New York went bankrupt and the state guaranteed the funds?”
Diamond Bar resident John Anderson, who says he owns a number of Orange County bonds through a municipal bond mutual fund, said Tuesday that he’s afraid he could lose much-needed retirement income and is outraged that “somebody was allowed to mismanage funds to this degree.”
Former County Treasurer Robert L. Citron resigned Sunday amid increasing criticism of his high-risk investing style, but Anderson wonders if the blame should be placed on Citron alone.
“I don’t know how a person could be given that much authority without anyone else knowing about it,” Anderson said, suggesting that county supervisors and officials of other financial agencies that collectively invested more than $7.5 billion through Citron should have exercised more oversight.
Given that government bankruptcies are rare, with the laws that govern them different than for other bankruptcies, even some sophisticated money managers were clueless Tuesday about the impact.
“Threatening to file bankruptcy is hysterical behavior unless there is something there that we don’t know, (perhaps) that liabilities outweigh assets” in the county pool, said Fred Prager, a partner with the San Francisco bond trading firm of Prager, McCarthy & Lewis.
“This is groundbreaking material here,” said W. Peck Ferrin, head municipal trader for Bank of America in San Francisco. “None of us has a handle on exactly what a Chapter 9 does” or how it would affect bondholders. Bank of America is a leading underwriter of county bond issues.
Complicating the problems facing the county’s bondholders is the fact that Moody’s Investors Service, a respected credit-rating firm, said Tuesday that it was starting a review of the ratings it has awarded 58 bond issuers with funds in the Orange County pool.
Richard Larkin, Standard & Poor’s managing director, said county officials are scheduled to meet Thursday morning in New York with S&P; rating analysts. But an “information blackout” by the county, he said, has kept him in the dark as to whether that meeting will take place.
Not everyone was gloomy, however.
“The long-term prospects for Orange County are excellent,” said Jeremy Ragus, California Tax Free Fund portfolio manager at Scudder, Stevens & Clark in Boston. “There is no real general obligation debt” that encumbers the county’s tax revenue, “and it is a fast-growing, high-energy, wealthy community that is going to survive this.”
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Times staff writers Ross Kerber, Don Lee and Debora Vrana contributed to this report.
