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ORANGE COUNTY IN BANKRUPTCY : Notes Issued by Montebello Reduced to Lowest Rating

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TIMES STAFF WRITER

Standard & Poor’s slashed investment ratings on $31 million in notes issued by Montebello to speculative-grade status Tuesday because much of the city’s cash is tied up in Orange County’s now-frozen investment pool.

S&P; cut its rating on Montebello’s $25 million of taxable notes--which come due Dec. 30--to its lowest possible grade for such securities, SP-3. That signals the firm’s belief that it is speculative whether Montebello can repay the principal and interest due on the notes.

The notes previously had carried S&P;’s highest grade for notes, SP-1-Plus, which indicates “a very strong capacity” to pay off the debt.

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S&P; made the same ratings change on Montebello’s $6 million of so-called tax and revenue anticipation notes, or TRANs, even though those notes do not mature until Sept. 29, 1995.

The primary impact of the ratings change is that it will drive up Montebello’s future borrowing costs. Investors will want a higher yield relative to the additional risk now attached to the city’s securities.

City Administrator Richard Torres discounted the downgrade’s effect. “As far as we’re concerned, ratings are recoverable,” he said. “I don’t consider it permanent damage.”

S&P; said the downgrade stems from uncertainty over whether the city of 60,000, which had invested $47 million, or 60% of its investment portfolio--can get enough of its cash out of the Orange County fund in time to repay its notes.

In Los Angeles, the City Council voted 11-0 with almost no debate to appoint a blue-ribbon panel of outside experts to review the city’s investment strategies and guidelines in the wake of the Orange County debacle.

“There’s no sense that we have got a problem, but we should always be alert,” said Council President John Ferraro. “It’s important to reassure the public that our investment practices are fiscally responsible.”

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City Administrative Officer Keith Comrie said the city might find it prudent to delay a plan to sell bonds in January to finance the purchase of refuse equipment “if the market isn’t comfortable” with new issues.

“We might have to wait on that,” he said.

Times staff writer John Schwada and correspondent Steve Eames contributed to this story.

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