Banks Warily Grant Loan to L.A. County : Credit: Mindful of Orange County’s ‘deadbeat’ status, they attach strict letter of credit to L.A.’s $1.3-billion package.

Los Angeles County closed its deal to borrow $1.3 billion on Monday, but a letter of credit attached to the borrowing imposes tough new restrictions to ensure that the cash-strapped county repays its debt.

For the first time, Los Angeles County will have to deposit its payments on the one-year notes directly to First Interstate Bank beginning in December, rather than keeping control of the money, according to the letter of credit documents released after the county received its cash at 7 a.m. Monday.

“It seems to give comfort to the banks,” said Maureen Sicotte, the county’s director of public finance.

Sicotte said Los Angeles County and other local governments and school districts across California are paying a price for “the dead-beat county” next door--Orange County, which filed for bankruptcy last December. “It’s a whole different world now.”

The letter of credit, issued by a syndicate of six Swiss, American and German banks, guarantees that investors who bought Los Angeles County’s tax and revenue anticipation notes last month will be repaid.

The letter of credit spells out detailed procedures in the event the county becomes insolvent and is unable to pay its bills.

The document also contains strict language allowing the banks to require immediate repayment of the entire $1.3 billion if the county fails to make any payment on time.

Rather than risk a potential downgrade of its credit rating, the county used the letter of credit from a group of banks to guarantee the repayment of its short-term notes.

But the banks--Credit Suisse, Swiss Bank Corp., Union Bank of Switzerland, Westdeutsche Landesbank, Morgan Guaranty Trust Co. and Bank of America--demanded tight restrictions in return.

They have repeatedly sought assurances about the county’s commitment to pay its debts as county supervisors began grappling with a $1.2-billion budget deficit so severe that county Chief Administrative Officer Sally Reed has recommended closure of County-USC Medical Center and elimination of one out of five county jobs.

Reed’s warnings that the county must immediately bring its spending into line with revenues or risk insolvency and blunt talk by the newest supervisor, Zev Yaroslavsky, about the possibility of bankruptcy clearly got the attention of the banks and Wall Street.

Rating agencies have placed the county’s long-term credit under review and undertaken greater scrutiny of the county’s finances.

County Treasurer Larry Monteilh said the budget situation is requiring constant communication with the group of banks, major investors and the rating agencies about any events, including lawsuits challenging budget cuts, that could aggravate the county’s financial problems.

Monteilh said the syndicate of banks insisted on the county setting aside payments on the notes with a third party rather than keeping custody of the money as has been the practice in the past.

“Almost from Day 1 in our dealings with the letter of credit banks, they were saying they wanted set-asides,” Monteilh said late last week. “From our end, we said we’d prefer not to do it. We’d prefer to keep the money. But that was a point they were not willing to negotiate on.”

The treasurer said the letter of credit specifically requires that the county make payments to First Interstate in five installments beginning with $452 million in December.

“The obligations of the county under this agreement shall be absolute, unconditional and irrevocable and shall be paid or performed strictly in accordance with the terms of this agreement under all circumstances whatsoever,” according to the letter of credit signed by the banks and county officials.

The letter also says the county must disclose any event that materially affects its financial condition or its ability to repay its debts--a requirement reinforced by new disclosure rules that the U.S. Securities and Exchange Commission began imposing Monday on all municipal governments that borrow money.