Four Investors Threaten to Block O.C. Rollover Plan

Four major investors said Friday they may seek to block Orange County’s proposed agreement to extend nearly $1 billion in short-term debts for another year, because the county at the last minute withdrew an offer to repay part of the debt within months.

“We’re adamantly against this,” said an official of a large East Coast trust company holding a big chunk of a $600-million issue of notes, which is part of the debt the county wants to defer to avoid a billion-dollar default that would send shock waves through the municipal bond markets.

The trust company was one of four big institutional investors contacted by The Times who said they plan to fight the agreement in court. All asked not to be named.

“We were negotiating in good faith with the county and they’ve pulled the rug out from under us,” the East Coast trust company official said.

Bennett J. Murphy, an attorney for the bondholders subcommittee in the bankruptcy, said, “There’s been a far stronger negative reaction [from note-holders] than I’d anticipated. I think that’s partly because [they haven’t yet seen] the final document.”

But, Murphy added, “there was a good deal of disappointment that the county would not be offering the interim disbursement.”

Under the proposed agreement filed with the Bankruptcy Court on Friday, note-holders would agree to extend the notes until June 30, 1996, in exchange for an extra 95 cents in interest for every $100 invested at the end of the year. In addition, the county would pay 73% of the interest monthly, and the balance of the interest at the end of the extension period.

But the agreement requires the support of those owning at least 50% of the notes in question, and can only be imposed on all note-holders if those holding 90% approve it.

At least four major note-holders are threatening to scuttle the proposed debt rollover, because the county suddenly decided on the eve of the agreement’s finalization Thursday to withdraw an offer to make partial payments of as much as $300 million to some holders of $975 million in short-term county debts that come due between June 30 and Aug. 10.

The partial payout, which was to have gone only to the holders of the $600-million issue that matures July 10, would have come from reserves that were accumulated specifically to pay off that debt.

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The county’s change of heart happened on Wednesday. In a memo distributed to note-holders, Murphy wrote that Orange County bankruptcy attorney “Bruce Bennett reported that early in the day [County Chief Executive Officer] William Popejoy withdrew the county’s offer for an interim distribution.”

Quoting Bennett in the memo, Murphy said the decision was based on three factors: Salomon Bros., the county’s financial advisers, had calculated that savings the county might have achieved by reducing the debt--which would earn higher interest during the extension period--was too low to justify the distribution. 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, Bennett denied that public relations concerns influenced the decision to change the deal, and said the county “didn’t change its mind.”

“The proposal was made by the bondholders,” Bennett said. “The county was mulling it over. The proposals 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.”

The county was initially agreeable to the partial repayment, but on condition that the note-holders would return the money if the county prevailed in court arguments that the notes were illegally issued, a key claim in the county’s $2.4-billion damage suit against Merrill Lynch & Co.

The county lost $1.7 billion on investments acquired largely from Merrill Lynch, and contends that the Wall Street firm sold the county some securities on credit, knowing that the county’s debt exceeded limits imposed by the state Constitution. It also claims that the firm knowingly sold the county securities that were ill-suited as investments for public funds.

Merrill Lynch has vigorously denied the county’s claims and maintains that former Treasurer-Tax Collector Robert L. Citron, who pleaded guilty to securities fraud and misappropriation of funds April 27, was a sophisticated investor fully aware of the risk and the state laws.

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.

“From the county perspective, there was the additional factor that many other constituencies weren’t happy about it,” he explained. “It was not a public public relations issue. We never thought this was one that was a real public issue. The other constituencies were less than enthusiastic about the prospect of letting reserves out.”

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

Lawyers and other officials involved in the negotiations say they believe the county reversed its position for fear of partly undermining its $2.4-billion claim against Merrill Lynch & Co.

Had the county repaid half of the $600-million debt, it might have appeared that the overall damages suffered by the county were less than the county claims in its suit against Merrill Lynch, said one attorney involved in the negotiations.

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Robert J. Moore, an attorney for the unsecured creditors committee in the bankruptcy action, said that making all of the note-holders happy is not 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 so-called Teeter Plan notes backed by delinquent property taxes, and lastly, those who hold $64 million in tax-free Teeter 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 have to look at the alternatives,” Moore said. “They are either going to have to support the rollover or let this debt default.”

Within the bondholder group, Moore said, there was concern that some investors would receive partial repayment while others wouldn’t.

Moreover, “certain note-holders are not convinced that the county cannot find some way to identify sufficient revenue in a timely fashion to repay all these notes,” Moore said.

But, Moore added, “the only [way] . . . would be through assistance from the state or through issuance of a massive amount of new debt, which would have to be backed by general county revenues. And I believe that would throw the county’s operating budget into absolute chaos.”

“Unless we get 50% support, this debt could default,” Moore said. “And then, unless the state comes in and saves the day, that’s what’s going to happen. It’s going to be a difficult process.”

Bennett said he remained confident Friday that despite the hassle over the interim disbursements, bondholders would buy the deal if only because the alternative is default.

“It’s a reasonable and responsible proposal and it is as much as the county can do under the circumstances,” he said. “If the bondholders don’t accept it, there’s nothing the county can do. We think the county has made a reasonable step to avoid default. If they don’t accept it, they’ll suffer the consequences.”

Note-holders have 11 days to file objections in Bankruptcy Court. A hearing has been set for June 26. The agreement still requires approval by the Board of Supervisors and U.S. Bankruptcy Judge John E. Ryan.

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