Moody’s to Rate Bonds for O.C.’s Eastern Toll Road : Finance: Agency cites concern over bankruptcy link in scheduling evaluation that no one requested.
Citing concerns about any bond issues linked to bankrupt Orange County, Moody’s Investors Service said Wednesday that it will evaluate $1.1 billion of bonds being sold next week to build a toll road in the county--even though it hasn’t been asked to review them.
Moody’s, one of Wall Street’s major rating services, said the unprecedented move was prompted by inquiries from worried investors.
However, market participants speculated that Moody’s moved to rate the deal so it could keep its hand in the large, high-profile issue and to help show the market it has become more vigilant since Orange County’s fiscal collapse.
The closely watched and long-awaited bond issue by the Foothill/Eastern Transportation Corridor Agency is the most ambitious deal planned by a local authority since the county filed bankruptcy Dec. 6.
While the cities of Anaheim, Huntington Beach and Laguna Beach have successfully sold small bond issues since the the crisis, the toll road sale next Wednesday is expected to be the first major test of investors’ appetite for Orange County bonds.
The bonds--the first billion-dollar issue to be sold in the national municipal market this year--were already rated “investment grade” by two bond rating houses when Moody’s announced it would jump in with a rating.
The size of the issue and credit quality questions have “generated a great deal of investor inquiry, which is heightened by its Orange County, California, location,” said Daniel Heimowitz, a director of Moody’s public finance department.
“This is unprecedented in the municipal market,” said Zane B. Mann, publisher of California Municipal Bond Adviser, a publication in Palm Springs. “And I suppose maybe [Moody’s] feel they have a responsibility to bond investors.”
Moody’s had bestowed on Orange County a highly coveted double-A bond rating before the county’s collapse. The firm was later publicly criticized for failing to discover the county’s fiscal problems and for giving investors a false confidence.
“Moody’s is just trying to play catch-up from the black eye they got from Orange County,” said one bond specialist who asked not to be named.
Heimowitz disagreed with that characterization, saying that Moody’s would have wanted to rate such a large toll road bond issue no matter where it was located.
Bond sellers usually pay a national agency for a rating to help determine the issue’s market price. While unsolicited ratings are sometimes given in the corporate debt market, they are almost unheard of for municipal bonds.
Citing the risks associated with the start-up toll road project, Standard & Poor’s Corp. has rated the new bonds BBB-minus, and Fitch Investors Service, reiterating those concerns, rated the bonds BBB. Both ratings are the lowest investment grade ratings given by the companies.
Officials at the Transportation Corridor Agency said Moody’s action would not delay the sale and that the agency will cooperate with Moody’s.
They were also hopeful that the bonds would not carry a stigma because of the Orange County name. “Sophisticated buyers clearly see us as a separate credit. We are not the county of Orange, we just live in the county,” said Wally D. Kreutzen, executive vice president of the agency.
“This should not have any impact on the sale of the bond issue; it is already investment grade by two rating agencies,” said Michael Patrick George, an investment banker with J.P Morgan Securities in San Francisco who is leading the sale. “And sophisticated mutual fund investors do their own independent research.”
The bonds, to be paid off with future toll collections, will pay for the Transportation Corridor Agency to build the 24-mile Eastern Transportation Corridor toll road and the Foothill Transportation Corridor’s 5-mile extension road in south Orange County.
The Eastern Transportation Corridor toll road, when completed, will connect the Riverside Freeway, near the county line, to Interstate 5, and is expected to be completed in 1999.
In February, 1993, another related agency, the San Joaquin Hills Transportation Corridor Agency, sold $1.2 billion in revenue bonds for a 15-mile toll road in South County that is expected to be finished in 1997.
The tollway agency, created in 1986 as a joint powers authority, had about $13 million invested in the pool run by former Orange County Treasurer-Tax Collector Robert L. Citron. It expects the return of about 80% of those funds as part of the settlement agreement.
The bonds are being sold with an extensive information packet, including a 600-page bond prospectus detailing risks of the deal from possible environmental litigation or natural disaster.
Market participants said they expect the deal to be priced to yield 7% to 7.5% interest.
* POPEJOY IMAGE CLOUDED
Legislators irate over trip for talks with Merrill Lynch chairman. A3
