Short-Term Debt Rollover OKd by Judge
One of the most important pieces in Orange County’s financial restructuring puzzle fell into place Tuesday as U.S. Bankruptcy Judge John E. Ryan approved a plan that allows the county to delay payment on nearly $800 million in short-term debt and avoid immediate default.
The county and its creditors have argued that, absent a rollover of notes that start coming due this summer, the financially strapped county could be forced to default on its obligations, further eroding an already tenuous relationship with Wall Street.
What Ryan did Tuesday was give the county approval to delay payment of its short-term debt for a year. Left unclear was whether noteholders would agree to the plan and where the cash-strapped county would get the money to repay its obligations.
“I think there will be a successful rollover and the county will not be in default [because of the impending short-term debt obligations],” county bankruptcy attorney Bruce Bennett said.
The county has said since December that it intends to pay its bills, but Ryan said that without the breathing space afforded by the rollover agreement that “would no longer by feasible. . . . We would have a default.
“It’s critically important for [Orange County ] to use the capital markets to solve its problems in this case.” Ryan said at the end of a complex five-hour hearing in his Santa Ana courtroom. “I’m unwilling to deny the county the opportunity.’
Attorneys for Orange County and its official creditors committee said the hard-fought compromise was a defining moment in the seven-month financial crisis, equal in importance to the settlement that the county reached with investors in the ill-fated investment pool.
Robert Moore, an attorney representing the county’s creditors and a major architect of the compromise, said that Ryan’s forceful decision eliminated nagging uncertainties faced by holders of the county’s short-term notes.
“He sent a very strong signal to the financial community, that the county now has the tools to achieve a successful rollover,” Moore said. “He made it absolutely crystal clear. It’s been reduced to a simple business decision. The uncertainty surrounding the rollover has been eliminated.”
Jon Schotz,a financial adviser to the creditors committee, said he would be “shocked if noteholders don’t take the rollover. If you don’t take this thing, I don’t know what you can do other than light your hair on fire, wave your arms and wait for Elvis to appear. There’s nothing else for them to do.”
The court-approved compromise requires that at least half of the county’s noteholders approve the plan by July 7. Noteholders will meet today in New York City to start discussing their options. The first of the notes, for $600 million, matures on July 10. Subsequent notes come due on July 19 and Aug. 10.
The plan that extends maturity dates to June 30, 1996, would allow Orange County to pay about 75% of its regularly scheduled interest payments each month. The agreement assures holders of notes that Orange County can use future revenue streams to pay off its current obligations. It also offers noteholders a onetime extra payment amounting to 95 cents per every $100 invested. The county would be required to pay remaining interest and principal on June 30, 1996.
Early Tuesday, attorneys for the county and noteholders were taken aback when Ryan indicated that he didn’t have enough information to determine if the planned rollover would pass muster according to state law.
That initial assessment prompted a stunned response from attorneys representing holders of county notes: “Why would any noteholder extend under that scenario,” asked attorney James L. Lopes, who represents Charles Schwab & Co. Inc., which holds $180 million in county-issued notes. “It isn’t going to happen.”
At issue was a state law that prohibits counties from using funds from future years to pay current debts. Tuesday’s compromise allows the county to use funds from the fiscal year that starts Saturday to help pay interest and principal payments on debts that, absent the county’s dire financial straits, would have been paid from funds accumulated during the fiscal year that ends Friday.
Attorney Patrick S. Shea, who represents investors in the ill-fated county pool, argued that it was unfair to pool investors to allow the county to use future funds to pay current obligations. “If anything,” Shea said, “this may enhance the level of [future] uncertainty.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Shape of the Debt Rollover
The plan approved in Bankruptcy Court extends by a year the time Orange County has to pay $800 million in debt. Particulars of the plan:
WHAT ROLLOVER DOES
* Extends maturity dates to June 30, 1996
* Allows county to pay about 75% of its regularly scheduled interest payments each month
* Assures noteholders that county can use future revenue to settle current obligations
* Offers noteholders onetime, extra payment of 95 cents per $100 invested
WHAT ROLLOVER POSTPONES
If half the holders approve the plan by July 7, these problem dates will be postponed:
* July 10: $600 million in taxable notes mature; county has $428.5 million in reserve to pay them
* July 19: $169 million in tax-exempt notes mature; county has $27.9 million in reserve to pay them
* Aug. 10: $31 million in tax-exempt notes mature
Source: County of Orange
