O.C., Creditors Reach Accord on Debt Rollover

Negotiators representing Orange County and its creditors reached an agreement Thursday to postpone payment of nearly $1 billion in county short-term debt for a year, despite the opposition of some bondholders who are threatening to challenge the agreement in court.

Lawyers for the county and its official bankruptcy creditors committee said they plan to file in court today an agreement outlining the proposed debt extension, which is designed to help the county avoid a default that would be sure to send shock waves through the massive municipal bond market.

But at least two large holders of the county’s bonds expressed outrage Thursday over the final version of the agreement, because the county at the last minute withdrew a tentative offer to immediately redeem roughly 50% of one issue of its bonds.

“This is a cram-down. They have reneged on their original offer and just told us take it or leave it. That is unacceptable,” said Stephen Ward, chief investment officer with Charles Schwab in San Francisco, which owns $41 million of the $600 million worth of taxable notes that the county sold last year. “The note holders do not support this plan.”

The debt rollover is a crucial part of the county’s effort to recover from the unprecedented bankruptcy action it filed Dec. 6.

The agreement would extend until June 30, 1996, the maturity dates of half a dozen note and bond issues due for redemption this summer.

Under the agreement, the holders of the county’s notes and bonds would receive about 73% of their original monthly interest payments during the extension period. At the end of the one-year extension, they would be paid the balance of their interest and an extra 95 cents for every $100 invested.

In exchange for the extension, the county is promising not to repudiate its debts, although it does retain the right in certain circumstances to challenge the legality of a controversial $600-million note issue.

Ward and another note holder who spoke on the condition of anonymity said Thursday that they plan to reject the deal for themselves, and might go even further by filing a legal challenge that could block it from going through at all.

“We thought we were close to a deal here,” said the second note holder. “Now they have just taken it away.”

The dispute was over a proposal tossed around during negotiations over the last two weeks that would have given holders of the $600-million note about $300 million right away, on condition that they return it if the county successfully challenged the legality of the issue.

As part of its $2-billion lawsuit against Merrill Lynch & Co., which sold the county most of the securities on which it lost $1.7 billion last fall, the county claims that Merrill Lynch arranged to issue the $600 million in notes in violation of California law.

Some holders of the $600-million issue wanted a provision that would return at least some of their principal immediately. But other creditors--primarily vendors and employee groups, but also other bondholders--were wary of letting the county give away one of its last pots of available cash to only one group, sources said. On Wednesday, county officials withdrew their offer, which is what caused Schwab and others to criticize the deal.

“It was fraught with problems,” one insider said of the provision, adding that it was a relatively small group, headed by Schwab, that was insisting on it. “I think when push comes to shove, a rollover deal can be done without it.”

Officials on both sides agreed that the deal would likely survive in spite of the sudden backlash from some note holders.

“The fact that the deal does not include interim disbursement does not mean the deal is dead. It means that Schwab is upset,” said county bankruptcy attorney Bruce Bennett.

“There are many other benefits to note holders that are in the document,” added Robert J. Moore, attorney for the creditors’ committee. “Individual note holders have not seen the final form of these documents. They will want to consider the benefits before they make their decisions. Each note holder has its own peculiar set of circumstances and concerns. Each of the note holders will have to assess it and make a decision.”

Moore’s six-member committee voted to approve the agreement Thursday afternoon, with five in favor and one abstaining. The Board of Supervisors still must sign off on the document, which also needs the approval of U.S. Bankruptcy Judge John E. Ryan.

The creditors had a self-imposed deadline of today to file the agreement in Bankruptcy Court, so that Ryan could hold a hearing on the matter before the special June 27 election on Measure R, the proposed half-cent sales tax hike measure that county officials say is crucial to their recovery effort.

But the deal does not go through unless note holders themselves give it the nod--and they will have more than a month to cast ballots.

If those controlling 90% of the debt vote yes, the rollover will go completely into effect; if more than 50% but less than 90% approve it, it will apply only to those voting yes.

Bennett J. Murphy, attorney for the bondholders subcommittee in the bankruptcy, said, “We’ll find out if the deal falls apart when the parties have a chance to vote on it. And every party will have a chance to vote on it.”

The committee representing participants in the county’s failed investment pool was not a party to the agreement, but became involved in the final negotiations in hope of avoiding a court challenge by pool investors.

Jon Schotz of Saybrook Capital Corp., financial adviser to the pool participants, said Thursday that the latest discussions diminished his committee’s concerns about the rollover. But he would not endorse it until seeing the final documents this morning. “Conceptually, we have an agreement, but we need to see the language,” he said.

Christopher Varelas of Salomon Bros., the county’s financial adviser, noted that many were horrified when a settlement agreement between the county and some 200 government agencies with money in the county’s bankrupt investment pool was first announced. But ultimately only a handful of agencies rejected it.

“There’s always going to be people early on in the process that say they want more and need more. Hopefully, they’ll see the county is providing all it can provide,” Varelas said. “We feel there are a lot of benefits for both sides.”

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