Orange County’s Risk-Averse Bondholders Stuck in Limbo : Bankruptcy: The county may need the loyalty of now-disaffected investors in order to recover.


Charles Schonfeld didn’t think it was a gamble when he invested in $1.26 million worth of municipal bonds. For added security, the retiree said, he bought all types of Orange County bonds--"the best you could get in California,” according to his bond salesman.

“I didn’t buy stocks, because you don’t know what you get with stocks,” said Schonfeld, 76, who lives in Hillsborough, an upscale suburb south of San Francisco. “With municipal bonds, I got less income, but I was told they were very, very safe. I expected a return for the rest of my life.”

Orange County’s collapse into bankruptcy last month stunned the mostly risk-averse investors who had faithfully bought billions of dollars in municipal bonds bearing the county’s once-golden name.

Concerned that the value of their bonds has plummeted and that future interest payments may be in jeopardy, Schonfeld and thousands of other individual investors are stuck in limbo--unable to sell their bonds without taking huge losses and wondering whether the county will make good on its debts.


Orange County may need the loyalty of these now-disaffected investors. Bond specialists say the county’s fiscal recovery will hinge on whether it can tap bond buyers for more cash to get it on its feet. Indeed, the county’s financial advisers are reportedly considering a large debt offering that could be sold in coming weeks.

Therefore, county officials are seeking to appease their bondholders even if it means cutting government operations and laying off workers.

A bankruptcy judge will decide today whether to approve the county Board of Supervisors’ plans to pay $3.9 million in interest to bondholders. If so, it would be a first signal that owners of bonds issued by Orange County and related agencies may receive priority consideration as officials decide how to manage the county’s remaining assets.

“There was nothing better in California than Orange County. That’s what the salesman told me,” recalled Schonfeld, a former retailer of women’s clothing who used part of his retirement funds to buy the bonds. “He had a whole mess of bonds, but I went heavily into Orange County because that was the county to be in. Now I expect to be paid. Period. I want what’s coming to me.”


Steady payment of interest and principal on its notes is the key to retaining the trust of county bondholders, experts say. If the county eventually hopes to sell some type of “bailout bonds"--as New York City did to recover from its fiscal crisis in the mid-1970s--it must maintain a good relationship with Wall Street and with the institutions and individuals that would buy them.

Since individual investors purchase more than 50% of municipal bonds, “they are not investors you could afford to turn off when you are as large as Orange County,” said Richard Lehmann, president of the Bond Investors Assn., a nonprofit group.

In an attempt to get small investors a bigger voice in the county’s bankruptcy proceedings, Lehmann’s association plans to seek court permission this month to form a bondholders committee to serve as one of the county’s creditor groups. Institutional buyers such as large mutual funds are represented in the bankruptcy proceedings, but individual investors have not been, Lehmann said.

To be able to entice buyers of any future bonds, Orange County is likely to secure some type of default insurance or ask the federal or state government to guarantee them. In New York’s case, Washington guaranteed the city’s bonds in the ‘70s, but only after congressional action on the matter.


Reviving investor confidence won’t be easy. W. Peck Ferrin, manager of bond trading for Bank of America in San Francisco, predicts that the municipal bond market will not look kindly on future sales by Orange County.

“It’d be a joke,” he said. “In my opinion, Orange County will be prevented from bringing anything to market for a long time.”

Ferrin said obstacles to full disclosure are currently keeping him from buying and selling bonds issued by California agencies that invested in derivative securities or are even remotely linked to Orange County.

“The bank won’t let me trade it, because I can’t provide full disclosure to my clients,” he said. “I’ve got to turn and say, ‘Mrs. Jones, I’ve got some bonds for you,’ but then I can’t tell her everything about them. I can’t give full disclosure” because no one knows the current status of the county’s finances.


A recent report from Moody’s Investors Service, a bond rating agency, said the county’s plan to make interest payments signals that “debt obligations will be a priority” in its bankruptcy but that “the position of debt holders remains very tenuous.” The future remains uncertain, Moody’s said, because the county has stopped setting aside funds to repay a large bond issue due in June and has tapped reserve funds to make payments on another set of notes.

Most investment advisers recommend patience, saying Orange County bondholders won’t lose money if they don’t panic.

“While mentally they must be a wreck, they should just grin and bear it and hold tight,” said Jim Lynch, president of Lynch Municipal Bond Advisory in New York. “People who own Orange County or related agency debt should simply hold on to their security. We feel Orange County will make these holders whole.”

Southern California retiree Herbert Mayer, who has about 10% of his six-figure municipal bond portfolio in Orange County bonds, said he will start “looking to a broader spectrum” in buying municipal issues, including bonds from municipalities in other states.


But Schonfeld said that if Orange County makes good on its financial promises to him, he will remain loyal. “If they live up to what they are supposed to do,” he said, “I will consider buying more Orange County bonds.”


Irvine school system may sell its headquarters and other assets. A3

More on Bonds


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