Note Sale by Anaheim Fuels Optimism in O.C. : Financing: City’s low 3.91% interest on debt is good news to others under the bankruptcy cloud. Insurance is the catch.

The city of Anaheim on Tuesday sold $22 million of insured one-year notes at a low-cost rate, a signal that other California agencies--especially those in bankrupt Orange County--may be able to calm the fears of concerned investors this summer.

The closely watched Anaheim note sale marks the start of the annual ritual known as “note season,” when schools, cities and the state of California sell more than $8 billion of short-term debt to pay operating costs until they receive taxes and other revenue later in the year.

After 13 firms offered to buy the notes Tuesday, Prudential Securities Inc. won the bonds with the lowest bid of 3.91%, a good rate for the Anaheim financing, traders said.

Still, to get the low-paying rate, the city had to purchase a $46,000 letter of credit--a special guarantee that nervous bond buyers now want from California agencies. Insiders said that without the insurance, Anaheim may have paid as much as 6%--or would have had difficulty selling the notes at all.

“For the first penguin off the iceberg, they did OK,” said Stephen Kelleher, a bond trader at Sutro & Co., a San Francisco investment banking firm. “But Orange County’s problems are driving up borrowing costs not only for the Anaheims and Santa Anas, but for the Marins and everyone in the state. Buyers are scrutinizing these bond issues a lot more closely, and that takes time and money.”

Although the Orange County city got a low-cost rate, under which it will pay $862,000 in interest on the one-year debt, it had to pay $46,000 for a letter of credit, a type of insurance policy from Union Bank of Switzerland.

Other California agencies that plan to sell notes this June are deciding whether to pay the added costs of insurance or let Wall Street penalize the bonds with high-cost pricing. Traders today are closely watching Marin County, which is expected to sell $37 million of notes without insurance.

The added costs of guarantees for notes and market uncertainty prompted state Treasurer Matt Fong on Tuesday to create a special task force to review note sales and, in a salve for cash-strapped schools, to promise to look into legislation that would allow the state to provide added security on upcoming note sales by school districts.

“Working together, we can find ways to minimize the problems imposed on all of us by the Orange County bankruptcy,” Fong said, noting that California agencies are facing higher costs and stricter rating requirements as they prepare to sell notes this year.

In an unrelated but closely watched sale today, the Foothill/Eastern Transportation Corridor Agency will sell $1.35 billion of toll road bonds. The financing is the first billion-dollar sale in the municipal market this year and marks the first significant bond sale by an agency in Orange County since the bankruptcy.

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In previous years, buyers, attracted by the short-term maturity dates, have typically scooped up the California notes at very low borrowing rates.

But Orange County’s Dec. 6 bankruptcy filing changed all that. Bond buyers, concerned that the county might not make good on notes it sold during 1994, and concerned about the priority set-aside payments on the notes were given in the bankruptcy proceedings, are insisting on costly guarantees.

Some of the major mutual funds which buy the bulk of annual notes, recently sent a letter to state politicians warning that fallout from Orange County’s decision could shake the note market in June.

Anaheim’s sale was considered successful and a good sign that Orange County’s schools, counties and cities will be able to sell notes in June, if investor concerns are addressed, traders said.

“The market reaction was good today,” said Keith Curry, the city’s financial adviser. “If you respond to investor questions, you can successfully sell notes from issuers located in Orange County.”

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Anaheim sold notes in May rather than in June because of concerns that Orange County’s fiscal problems could worsen if voters reject a sales tax hike on June 27. That rejection could also impact bond prices, he said.

Anaheim, which had $169 million in the county’s bankrupt investment pool, borrowed $95 million last year just to invest in the fund.

“We did better than we anticipated, and we are the first ones out of the box,” said Ed Zacherl, assistant city finance director for Anaheim. “Sure, Orange County’s woes are costing the taxpayers money. It’s increasing borrowing costs. But the market didn’t penalize us. I’m sure it was important that we got insurance.”

Financial advisers and traders said they expected more of California’s cities and counties to pony up the cash this year for added security features such as insurance. Others said that the sooner Orange County gets its fiscal house in order the cheaper it will be for all agencies in the state to borrow money.

“Residents of Orange County need to recognize that a problem exists here,” Kelleher said. “And it’s not just a Wall Street problem. It’s their problem.”