ORANGE COUNTY IN BANKRUPTCY : Investors Look for Edge, Lawyers for Clients : Counsel: Scores of attorneys woo cities and other agencies, which hope to improve their chances of recovery. School districts may use a different strategy in arguments to the court.

By ROSS KERBER

Dec. 12, 1994 12 AM PT

TIMES STAFF WRITER

SANTA ANA —

Even before the first hearing is scheduled in Orange County’s landmark bankruptcy filing, some of the 187 cities, school districts and agencies with assets in the county-run investment pool are looking for a legal edge to improve their chances of recovery from the ashes of the fund.

Uncertainty over whose claims have priority--from the Orange County Transportation Authority, with more than $1 billion invested in the pool, to the Yorba Linda Elementary School District, with $47,480 at stake--has attracted scores, perhaps hundreds, of bankruptcy attorneys and investment consulting firms to Orange County, all trolling for clients.

Some city administrators say they have been inundated with proposals for legal representation, unsolicited investment advice and other suggestions for maneuvering within the creditors’ committees that will be appointed after a U.S. trustee has been assigned in the case.

“They’re like sharks, there are so many who have contacted us,” said Paul O. Brady Jr., Irvine’s city manager. He said he plans to interview about a dozen law firms beginning today and eventually expects to pay between $200 to $500 an hour for legal advice on the bankruptcy.

“I don’t know what we’re looking at, but I do know there’s going to be too much work for our regular city attorney to handle it all,” Brady said.

Claims against the troubled fund will be driven by more than just the mercenary interests of would-be advisers, however. School districts, which were required by state law to invest in the county pool, are mainly concerned that their payrolls are met; special districts and cities, which often have fewer employees, may be more interested in the long-term value of the fund and their ability to finance future projects.

When it comes to the difference between schools and other agencies, “basically we’re on a day-to-day basis for our funds, and they’re not,” said Colleen Wing Chandler, assistant superintendent for the Capistrano Unified School District. With 33,000 students, Capistrano Unified is the third-largest school district in the county. District officials are hiring a bankruptcy attorney, she said.

On Friday, the county sent out paychecks as scheduled to 28,000 school bus drivers, cafeteria workers and secretaries throughout the county.

Irvine’s Brady, who is president of the Orange County City Managers Assn., said three major groups of creditors will emerge: cities, school districts and a hybrid alliance that would include water and sanitation districts. The largest creditors--including the transportation authority, which plans to select a bankruptcy attorney at a meeting today, will probably remain separate.

Ideally, each of the three major groups would be represented by a single attorney, Brady said. “The last thing that needs to happen is to have 29 or 30 or whatever number of attorneys in the courtroom looking for access,” he said.

Unless the cities can agree to cooperate in court, the larger investors will feel compelled to hire their own counsel, Brady said.

Bankruptcy attorneys and consultants scouting for clients dismiss as naive any talk of minimal legal proceedings. By turning to bankruptcy court last Tuesday, they say, county officials admitted their own lack of expertise in the complex financial transactions, such as derivatives and reverse-repurchase agreements, that helped devastate the fund, which lost an estimated $2 billion since Jan. 1.

City administrators, often unfamiliar with financial markets, are in greater need of professional services, they say.

“You could call us vultures, but it’s really that the people we represent need our help,” said one investment banker, who asked that his name not be used. He attended a county news conference in Santa Ana late last week to look for creditors who might be interested in his services.

“They’re all bureaucrats, and bureaucrats can’t keep up with the sophisticated financial instruments that the Wall Street guys are using on this one,” he said.

Paul Bennett, partner at a San Francisco law firm that is also looking for Orange County clients to represent, said the uncommon nature of the filing will also require additional legal work. Previously, the largest municipality to file for Chapter 9 protection under the federal bankruptcy code was the city of Bridgeport, Conn., with $200 million in bond debt, a fraction of Orange County’s. That case was dismissed by a judge after the county was found to be solvent.

Although some individual bondholders have already filed suits against the county, Bennett said “the real work is going to be for all the (municipalities) that were part of the investment fund, and each of them has their own constituency of taxpayers.

“I think it’s going to take a while, in excess of one to two years,” to sort it all out, he said. “I see an awful lot of constituencies . . . and each one of them has different financial requirements.”

Frank Ury, a board member of the Saddleback Valley Unified School District, agreed that his district’s situation is different enough to warrant separate legal counsel. The district plans to confirm its own bankruptcy attorney, from an Orange County firm, at its meeting Tuesday, he said.

“Our basic focus is going to be that the state compelled us to put the money in the fund, so there’s a very good chance that the districts will have the opportunity to compel the state to resupply our funds,” Ury said. “That’s a lot different than what the cities are going to say.”

Perhaps the person on the most familiar ground is Corona del Mar investment banker Chriss Street, head of an investment consulting company and an early critic of former Treasurer Robert L. Citron’s heavily leveraged investment strategy.

Street worked with several creditors in one of the largest Chapter 11 bankruptcy filings to date, that of steelmaker LTV Corp., and this fall he helped a large mutual fund file involuntary bankruptcy charges against Greyhound Lines Inc., which had been under Chapter 11 bankruptcy protection from 1990 to 1991 after a nationwide drivers strike.

Although a Chapter 9 case should be significantly different from the Chapter 11 cases he has worked on, Street said he expected to see greater cooperation among creditors than in Chapter 11 filings. In those cases, he said, pension funds and labor unions with concerns about members’ back pay are often at odds with vendors, who would often accept a lower payment rate to reach a swifter settlement.

“Often in (Chapter 11) bankruptcies you see the creditors fight to make sure the company doesn’t get in a position to wait out the creditors. Chapter 9 is dramatically different,” he said, because the debtor--in this case, the county--has more power to decide when and how it will reorganize itself.

Street said he had spoken to several of the county’s creditors and would like to work with any creditor committee appointed by the trustee. “I’d be surprised if I wasn’t at least interviewed” for such a position, he said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

A Primer on Bonds

Some basic facts on the bond market and how bonds work:

Buying bonds

Investor lends money to a corporation or government with the promise of earning a set interest and being paid back their original investment on a specific date.

BOND ISSUERS

* Corporations: Use money for operating expenses, expansion and modernization

* U.S. Treasury: Finances government activities

* Municipalities: Pay for public projects, finance operating budgets

Return on Bond

Investor gets payments every year until bond matures. Example: A 5%, 10-year, $1,000 bond yields $50 annually. At maturity, after 10 years, investor gets face value of bond--$1,000.

Secondary Trading

A bond’s interest rate is usually fixed at the time of purchase and typically does not change even though market interest rates may. However, an investor can sell a bond before it matures. Sample scenarios of a sale:

Discount Selling

As interest rates rise, investor must sell bond below original face value (at a “discount”) to attract buyers.

Premium Selling

As interest rates drop, investor can sell bond above original face value (at a “premium”) because older, higher rate, is attractive.

Bond Talk

* Coupon: The interest return a bond pays.

* Maturity date: When a bond expires and must be repaid.

* Par value: Dollar amount of bond when it is issued.

* Short-term bond: Normally repays investor in one year or less.

* Intermediate-term: Investor is paid back in two to 10 years.

* Long term: Investor is paid back in one to 10 years.

* Investment grade bonds: Highest rated, considered least risky.