Orange County got a boost in confidence from Wall Street Friday when a major bond rating agency removed the Orange County Transportation Authority from its special watch list and restored high ratings on $465.3 million in bonds, saying that OCTA can pay its debts.
The action by Standard & Poor's is the "beginning of many similar events" that should eventually restore investor confidence in Orange County and open the doors of Wall Street to county governments, said William J. Popejoy, the county's new chief executive.
The rating agency, however, lowered its rating on $81.6 million in securities issued by the Orange County Integrated Waste Management Department, and it kept $197.8 million in revenue bonds for John Wayne Airport on its credit watch "with negative implications."
Bonds put on the S&P; credit watch with negative implications means that ratings could be lowered, which would increase the borrowing costs for the issuer of the bonds.
The OCTA had poured $1.13 billion in proceeds from the bonds into the county's troubled investment pool, making it the second-largest participant behind the county among 187 cities, school districts and other government entities. The bond portfolio lost nearly $1.7 billion in value last year, causing county leaders to file for bankruptcy protection.
In removing OCTA's bonds from its credit watch, S&P; said that the transportation agency has a "demonstrated ability to meet current and future debt service payments" from the sales tax revenue it receives under Measure M, approved by voters to improve county roads. OCTA has issued two series of bonds and now owes $465.3 million.
Popejoy, appointed last week by the Board of Supervisors to a six-month stint to help the county out of bankruptcy, said that S&P;'s action provided county leaders "a sigh of relief."
"We have said that the first priority is to repay the bondholders," he said. "If there was any doubt before, there should be no doubt now."
Popejoy, a former savings and loan executive who is no stranger to Wall Street, said that in talks he has had this week with New York brokers, analysts and investors, he has sensed "a higher level of confidence that we can handle the problems."
At OCTA, officials were overjoyed with the restored ratings, which put one series at AA and a second series, which had been split, at A+ and AAA.
"This is great news for us and for the county overall," said Gary Burton, OCTA's deputy director of finance and administration. "I think that this will be something that will help lead the county out of bankruptcy and help let the country know we're getting out of it."
Stan Oftelie, OCTA's chief executive, said in prepared remarks that S&P;'s action was a "vote of confidence."
More important, the action will help OCTA once again seek funding in the financial markets.
S&P; continued its credit watch on OCTA's commercial paper, consisting of inexpensive short-term loans the authority issues to companies and investment funds, but S&P; said it will drop that soon. Burton said OCTA no longer has any commercial paper outstanding because it converted $100 million of the paper into a loan with the Industrial Bank of Japan Ltd.
"We want to issue more commercial paper--$125 million--by mid-March," he said. While its bank loan carries a variable rate that is now around 7%, he said, OCTA can issue commercial paper to borrow at rates of 3% to 4%.
S&P;, however, wasn't so kind Friday to other county entities.
It lowered its ratings on securities issued by the waste management department from A+ to BBB and put the securities on its credit watch with "developing" implications, which means that ratings could be raised or lowered in the future.
S&P; said the system, which is responsible for the county's disposal of solid waste, was downgraded because of an increased risk that it will not get most of its $163 million back from the county fund and that the county may appropriate the department's surplus funds in the future.
S&P; maintained its credit watch on the airport bonds because of concerns about actions the county might take to appropriate airport funds as it develops and implements a plan to work itself out of the bankruptcy it declared on Dec. 6.
The rating agency said it will review county plans as they are filed to assess the impact on the bonds issued by the airport and the waste management department.