Pool Investors Near Agreement on Repayment

The committee representing participants in Orange County’s collapsed investment pool announced Friday that it has reached a settlement in concept on repayment of nearly 200 schools, cities and special districts that had money in the fund.

Under the pact, which differs only slightly from the original plan brokered by the Orange County Business Council last month, each investor would receive 77% of its money back in cash. Schools would receive 13% more in “recovery notes,” and other investors would get 3% in recovery notes.

Jon Schotz, of Saybrook Capital Corp., the financial advisers to the pool participants, said the county had improved the original deal by promising that the recovery notes are “as good as gold.” But county bankruptcy attorney Bruce Bennett warned that he has yet to find a sure-fire way to turn the notes into instant cash.

“This plan makes sense and we want to move forward on this,” said Irvine City Manager Paul O. Brady Jr., one of seven members of the Pool Participants Committee.

Several key issues remained unresolved in the tentative agreement, including exactly how the county will secure IOUs it intends to give investors as part of the repayment plan. Participants planned to work through the weekend in hopes of completing an agreement.

While some officials expressed disappointment that the plan does not provide for a full and immediate pay-back, others said they were encouraged that an agreement was emerging and expressed guarded optimism that agencies would eventually receive all their money.

“There’s nothing in this plan that diverts us from getting 100% back,” Brady said.

Under the agreement, all of the $5.7 billion remaining in the county’s collapsed pool would be distributed to investors--including cities, school districts, water districts and county agencies--by this summer. Before the bankruptcy, the pool totaled $7.6 billion.

The plan would allow the pool’s nearly 200 investors to select one of two options for the return of their funds.

Option A provides a complex formula for reimbursement in full over time and if certain conditions are met, but prevents the participant from seeking additional money through further negotiations or lawsuits.

Under this plan, school districts would receive 90 cents on the dollar and all other agencies would receive 80 cents upfront, with the rest promised later.

Brady admitted that negotiators are still debating the kinds of assurances the county will give investors about receiving the rest of their money. Until now, the county has been willing only to issue unsecured IOUs. Investors have asked for a stronger commitment.

“We are trying to firm up the language to be more than a hope, a promise and a prayer,” Brady said. “We need for the county to make its best effort over a period of time” to repay the full 100%.

Under Option B, investors would immediately receive 77 cents of every dollar they had in the pool and be free to pursue litigation to recover the remainder.

School officials expressed relief that a settlement is at hand, noting that some of the county’s hardest-hit districts are within a few weeks of needing cash to meet payrolls.

“This should allow schools to continue operating without the fear of going bankrupt,” said John Nelson, assistant superintendent of the Orange County Department of Education. “This agreement makes it possible to keep schools open for the rest of the year.”

But Nelson said it remains crucial that the school districts eventually receive the full 100% of their investments. He said a 90% return would still leave Orange County school districts facing a $100-million loss.

“It becomes very critical for all creditors and school districts to make every effort to eventually (receive) 100% of their funds,” Nelson said.

Blake Anderson, assistant general manager of the Orange County Sanitation Districts and a member of the committee representing pool participants, said the tentative accord is an important achievement because it would allow the investors to get their hands on badly needed cash.

“The one dead certainty is the 77 cents,” he said. “Let’s get that in our pocket.”

Andrew V. Czorny, treasurer of the Orange County Water District, and a member of the investor committee, said he believes most water, sanitation and other districts would agree to one of the two options offered under the deal. “I think (pool) participants are very pleased with what’s been done so far,” he said.

After a private meeting Friday afternoon of about 70 special district representatives at which the deal was presented, Czorny characterized the mood of investors as “upbeat.”

But he cautioned that the settlement remains a verbal understanding only and “I think everybody is holding their breath until they see the written agreement.”

While most, if not all, school districts are expected to line up behind Option A, several cities have expressed an interest in pursing court action for the return of their funds.

The city of Huntington Beach recently filed suit against Merrill Lynch, the Wall Street giant that underwrote county bonds. A few other agencies are also considering legal action.

“We want to retain the right (to sue) and don’t think there is any basis for us to give up that right,” said Arthur De La Loza, Huntington Beach’s deputy city attorney.

Other city officials said they were happy about the progress toward an agreement, but would reserve judgment until it is finalized.

“We are pleased, but we have to see the words,” said Seal Beach Mayor George Brown. “We want to see it in writing.”

Bennett, the county’s bankruptcy attorney, said reaching an agreement on the 101st day since the county declared the largest municipal bankruptcy in U.S. history Dec. 6 “is nothing short of miraculous.

“If it comes to pass, I think it will be an accomplishment that all of the participants can be proud of,” Bennett said.

“There are a lot of details that remain to be worked out, and some of them are pretty material, but we’re going to work hard this weekend to work all of them out,” he added. “If we do succeed, we hope we will have what is the best of all possible settlement agreements, and that is one that is good for both sides.”

Bennett said he expects to reveal the settlement in full to the public as early as Monday. The Board of Supervisors and the committee of pool participants would then have to formally approve it.

The documents would then go to each pool participant. If 80% of the investors, holding 90% of the money, endorsed the plan, it would be sent to U.S. Bankruptcy Court Judge John E. Ryan for his approval.

Bennett said he would expect the deal to get to Ryan by month’s end. The creditors committee in the county’s overall bankruptcy can oppose the settlement.

If Ryan approves the settlement, pool participants would have 12 days to choose option A or B.

Times staff writer Lee Romney contributed to this report.

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Payoff Options

The conceptual plan to repay nearly 200 schools, cities and special districts in the collapsed Orange County investment pool closely resembles one brokered last month by members of the Orange County Business Council. The highlights:

* Each investor may select one of two options.

* Option A returns 90 cents of every dollar in the pool to schools, 80 cents to other agencies. All investors would receive promises for the remainder. Option A precludes the right to sue or negotiate for more later.

* Option B allows any investor to take 77 cents on the dollar now but reserves the right to negotiate or sue for the rest.

* At least 80% of pool participants, holding 90% of the money, must select one of the two options for the deal to be concluded.

* Still unresolved: exactly how the county will secure IOUs it intends to give investors as part of the repayment plan.

Source: Orange County Investment Pool Creditors Committee