Moody’s Attacks O.C. on Its Return to Bond Mart

As Orange County prepared to take its first step back to the municipal bond market this morning, a major rating agency issued a biting attack on the bankrupt county, reminding investors that without the insurance the county purchased, its credit would remain in the dumps.

Financial advisers and underwriters for the county spent Monday courting buyers across the nation for the $295 million in so-called recovery bonds they plan to sell this week to help repay the 200 schools, cities and other agencies that had money in the county investment pool when rising interest rates caused $1.7 billion in losses.

But Moody’s Investors Service may have soured the market by pointing out that although the recovery bonds carry top-shelf ratings because they are backed by MBIA Insurance Corp., Orange County has not come near winning its confidence.

“Even if the county is successful with its budget cuts, they remain inadequate to meet all obligations,” the rating agency said in a two-page statement. “Without the half-cent increase in the sales tax, which voters will consider on June 27, the county does not have a viable plan to repay all its debt.”

Moody’s, along with Standard & Poor’s, downgraded Orange County to a rating of below investment grade after sour investments sent the county to Bankruptcy Court on Dec. 6. In its critique Monday, Moody’s warned that though the recovery bonds earned MBIA’s triple-A rating, “they are not insulated legally and financially from the county.”

“Their credit quality remains entwined with the county’s other obligations,” the rating agency stated. “We cannot review the credit quality of one obligation in isolation while the county is approaching default on other obligations.”

Despite the gloomy review from Moody’s, the Board of Supervisors received an upbeat presentation on the recovery bonds from its finance team Monday afternoon. County bankruptcy attorney Bruce Bennett also brushed off the latest attack from the rating agency.

“I thought it was regrettable that Moody’s continues to fail to analyze the refunding recovery bonds on the merits, and instead sees it as a vehicle to explain their point of view as to how the county should resolve its financial crisis,” Bennett said in an interview Monday afternoon.

At a special session of the Board of Supervisors, underwriters and financial advisers said they planned to begin pricing the recovery bonds when the market opened in New York this morning, and expected to finish the sale by Friday, in time to pay off pool investors.

As part of a court-approved settlement, schools will get 13% of their Dec. 6 deposits back in proceeds from the recovery bonds, and other agencies will get 3% of their deposit back that way. Pool participants already have received about 77% of their money back in cash, and have a set of IOUs from the county for the rest.

The county will pay about $10 million to MBIA for its insurance policy. While that is four times the average rate, it pales compared to the expected penalty of $100 million the county would have suffered over the life of the 20-year bonds if it returned to the market without insurance.

The board lauded the finance team’s effort, but financial adviser Chris Varelas cautioned against celebration, noting that without the passage of Measure R, the half-cent sales tax on the ballot June 27, the county’s overall recovery effort will falter.

“I feel that I must point out that this financing will be very special in nature,” he told the supervisors. “This is not the type of financing that we can hope to do again unless and until we identify clear and secure new revenues.”