Investors May Fight Orange County’s $1-Billion Rollover

Four major investors in Orange County bonds said Friday that they may take legal action to block a proposed plan to roll over nearly $1 billion in county borrowings for another year, following a last-minute change in the terms of the deal.

“We’re adamantly against this,” said an official at one of the unhappy investors, a large East Coast trust company that holds a big chunk of a $600-million county bond issue that comes due July 10.

Collapse of the deal could lead to Orange County’s default on some of its debt, a step officials are desperately trying to avoid for fear of destroying the county’s ability to borrow in the future.

Late Thursday, the county withdrew an offer to pay off as much as half of the $600-million debt issue from reserves accumulated specifically to pay back the notes.

County officials had offered to make the partial repayment on condition that the note holders return the money if the county prevailed in its legal claim that the notes were illegally issued--a key element of its $2-billion damage suit against Merrill Lynch & Co. The county, which lost $1.7 billion on investments made largely through Merrill Lynch, contends that the Wall Street firm knew that the county’s debt exceeded limits imposed by the state constitution.

Bennett J. Murphy, an attorney representing the county’s bondholders in Bankruptcy Court, wrote in a memo to the creditors that the county’s change of heart was based on three factors:

First, Salomon Bros., the county’s financial adviser, had calculated that the savings the county hoped to achieve by trimming the amount of debt to be rolled over at higher interest rates were too little to justify the partial payment. Second, some unspecified legal issues could cause other creditors to withdraw support for the agreement. And, finally, “there was insufficient reason to risk a public relations problem upon announcement of the interim payments.”

Responding to questions Friday, the county’s chief bankruptcy lawyer, Bruce Bennett, denied that public relations concerns influenced the decision to alter the terms of the deal, adding that the county “didn’t change its mind.”

“The proposal was made by the bondholders,” Bennett said. “The county was mulling it over. The proposal kept on changing, and as it changed it made the economics of it progressively less attractive. It was really a decision in the end that there was next to no economic advantage for the county. It failed the cost-benefit analysis.”

Bennett said he was unsure why Murphy’s memo included a reference to “public relations.” If anything, Bennett said, the county was concerned that other parties to the rollover were unhappy with the interim disbursement--not the general public.

Others involved in the negotiations said the county worried that paying some bondholders and not others might cause those not getting a partial distribution to reject the proposed agreement.

“We were negotiating in good faith with the county, and they’ve pulled the rug out from under us,” said the official of the East Coast trust company, which asked not to be identified. “We just aren’t going to play anymore.”

Robert J. Moore, the attorney for the bankruptcy creditors committee, said keeping the county’s bondholders happy has not been easy. They include the owners of the $600 million in taxable notes, investors in two county revenue anticipation note issues totaling $200 million, holders of $111 million of taxable notes backed by delinquent property taxes, and those who hold $64 million in certain tax-free notes.

“There’s a lot of anger now and there’s going to be a lot of dissonance, but at the end of the day, these note holders are going to have to look at the alternatives,” Moore said. “They are either going to have to support the rollover or let this debt default.”