Creditors Urge Interest Hike on Notes if Debt Is Extended : Bonds: Committee seeks a 2 1/2% boost--or $31 million--to sweeten the rollover should the county not be able to pay its obligations on a timely basis.
Orange County’s creditors asked the county Tuesday to promise bondholders at least a 2 1/2% interest boost on notes if they are to agree to a one-year rollover of more than a billion dollars in debt coming due this summer.
County attorneys met to discuss the proposal late Tuesday with representatives of the creditors committee, who plan to present their plan to a full meeting of bondholders, vendors and labor leaders today)
The plan also would give bondholders the option of redeeming their notes early if reserves become available and they seek assurances that the county will set aside reserves for repayment of the bond debt.
“The ball is in the county’s court,” said Robert Moore, an attorney with Murphy, Weir & Butler, which has represented the creditors committee of bondholders and vendors since Orange County filed for bankruptcy protection Dec. 6.
“If the county is not able to satisfy this debt on a timely basis, there has to be some economic penalty paid to induce a bondholder to consent to an extension and avoid payment default,” Moore said. “The county can’t expect to avoid payment default at no additional cost.”
The creditors’ counterproposal to sweeten the repayment delay with interest penalties that would top $31 million contrasts with the county’s plan to defer the debt without changing interest rates--a plan that some rating agencies loudly criticized as akin to default.
County bankruptcy attorney Bruce Bennett said the counterproposal is “unacceptable in numerous respects,” particularly on the issue of interest rates.
While Bennett said it would be “premature and inappropriate to comment on negotiations that are ongoing,” he said the counterproposal may signal an irreparable rift with the creditors committee.
“We will try to work out mutually agreeable solutions,” Bennett said. “But in the end, the county may have to make a proposal that the committee doesn’t agree on up front and the individual bondholders might have to decide individually what to do.”
The creditors’ plan seeks interest rates on the notes that are 2 1/2% higher than the June, 1995, rate for one-year notes. That represents more than a 2 1/2% boost because rates have already risen since the notes were issued last year, Moore said.
Payable this summer are:
* $600 million in taxable notes floated last year to raise money for the ill-fated investment pool, payable on June 30;
* $175 million in taxable and tax-exempt notes that were secured by property taxes, payable on June 30;
* $200 million in tax-exempt notes secured by tax and other revenues, payable on July 28 and Aug. 10;
* $300 million in school district borrowings guaranteed by the county, payable on July 28.
The creditors committee also wants the county to agree to redeem the notes early if additional revenues become available, and assurances that the county “honor the sanctity of the bond reserves” and not use money set aside for bond payments to meet other debt obligations.
“We want the county to acknowledge that the existing debt is valid and will be dealt with in a plan, just as they plan to do for pool investors,” Moore said. “What they were offering is that they would acknowledge that the existing debt was valid in exchange for an extension of the debt maturity. That is not acceptable to us.”
Moore said it was unclear whether bondholders would agree to the rollover, even if the committee manages to secure some firm legal commitments from the county.
The county has brokered a proposed settlement with cities, schools and other public agencies that lost money in the county’s now-collapsed investment pool. The county plans to present that settlement to U.S. Bankruptcy Judge John E. Ryan on May 2 and hoped to also present a negotiated agreement with the creditors committee, Bennett said.
But he said the county would not “be influenced by any artificial deadlines imposed by the bondholders committee.”
Hugo Quackenbush, senior vice president of Charles Schwab in San Francisco, which holds $41 million in Orange County bonds coming due this summer, warned that any failure of bondholders to come to an agreement with Bennett could spell disaster for the county’s tentative pool settlement, which promises marketable recovery notes to investors, most of them to schools.
“It really complicates things a great deal if the bondholders and Bennett and the supervisors can’t agree on some workout plan,” said Quackenbush. “Who is going to (buy) the recovery notes if the other notes are in default?”
Municipal bond experts said Tuesday that despite differences on detail, the negotiations were nevertheless encouraging.
“Default can be averted and it’s only a matter of price right now. From that point of view it’s all positive,” said Richard Lehmann, who heads a bondholder information group for corporate and municipal bondholders.
“It would astound me if there were a meeting of the minds on the rate of interest early on. This is going to go all the way to the eleventh hour on June 27 before anyone blinks on this. . . . It’s clear that the county will have to pony up some more interest costs, as they should.”
