Approval of Debt Rollover for O.C. Staves Off Default : Finances: Wall Street investors extend for a year the due date for repayment of $800 million. But with no source of revenue, the move ‘just postpones things,’ an expert says.
Convinced they had no other choice, Wall Street investors Friday voted overwhelmingly to extend the repayment dates on $800 million in Orange County notes due this month and next, enabling the bankrupt county to avoid a dreaded default on its debt--at least for a year.
The extension forestalled the chaos such a default might have caused in the municipal finance market and staved off threatened intervention from Sacramento, but actually resolves nothing, since the county still has no known source of revenues with which to repay the debts when they become due in June of next year.
“This just postpones things,” said Christopher (Kit) Taylor, executive director of the Municipal Securities Rule Making Board, which monitors the $1.3-trillion market of municipal debt.
“They’ve still got to come up with $800 million by next year. Where are they going to get it from?” Taylor asked. “There’s a sense of denial here, of ‘Oh, we’ll deal with this tomorrow.’ Who knows what tomorrow will bring?”
The debt-extension agreement was immediately challenged Friday by other county creditors, with attorneys for county vendors and local governments that lost money in the ill-fated Orange County Investment Pool filing last-minute court appeals of the debt rollover, which had been approved by U.S. Bankruptcy Court Judge John E. Ryan.
Patrick C. Shea, lead attorney for the pool participants, asked for a stay to block the rollover pending his appeal, which Ryan will consider at a hearing Monday at 11 a.m.
After months of often contentious talks--first with the county, then among themselves, and finally, this week, with representatives of Gov. Pete Wilson’s office--several noteholders said they decided to accept the rollover chiefly because of signals from the state that it would not allow the county to repudiate the debt once it was extended.
Moreover, they saw no alternative.
“It was about as voluntary as the federal income tax,” said Stephen Ward, chief investment officer of the San Francisco brokerage firm Charles Schwab & Co., which owns $41 million in notes and had been the most outspoken critic of the rollover plan. Ultimately, however, Ward’s firm voted for it.
“This is a truce, a holiday cease-fire. We have to see what the county’s Plan B is,” Ward said.
“Did these noteholders have any choice? They were up against the wall,” said Robert Gore, a municipal bond trader with Crowell Weeden & Co. in Los Angeles, who added that there remains “a lot of skepticism about whether the county will pay them next year.”
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In all, noteholders owning 98.7% of the outstanding debt sent ballots to a New York bank Friday approving the agreement, which gives them an extra 0.95 percentage points of annual interest and a promise that the county will not seek to renege on the deal by invoking a provision of the California Constitution that prohibits one year’s debts from being paid with another year’s revenues.
Because the extension won the support of the holders of more than 90% of the debt being rolled over, the debt postponement will apply to all of the investors.
“The decision to roll over is a gesture by the noteholders to give the county the breathing room it needs to get back on track,” said Jean Morris, a lawyer for the Boston Safe Deposit & Trust Co., which owns $25 million of notes. “They’ve asked for more time and we’re giving it to them. . . . We are hopeful they are going to do what they promised.”
The added time was all the more critical in the wake of the defeat two weeks ago of Measure R, a ballot proposal that would have raised the sales tax in Orange County by one-half of a percentage point--from 7.75% to 8.25%--and given county government an estimated $130 million a year to begin bailing itself out of its $1.7-billion bankruptcy.
Market insiders said that investors had little choice but to accept the extension since the alternative was holding defaulted notes, but they still expressed dismay at the precedent being set.
“I just think the municipal bond industry is helping to bail these guys out,” said Zane B. Mann, publisher of the California Municipal Bond Advisor newsletter. “These [Orange County] supervisors are as adept at getting away with murder as the Menendez brothers. It seems like every time something comes up, they get out of it.”
County officials celebrated the success of the rollover, a key element of their recovery plan since filing for bankruptcy protection Dec. 6.
But they acknowledged that the good news brings only time, not money.
“It takes some of the urgency out of the situation, and hopefully the county can come up with a program to get the bondholders paid and get the problem behind us,” said Chief Executive Officer William J. Popejoy. “It gives the county a year--but a year goes quickly, so we have to put together a plan to get the money paid. It’s still an obligation of the county to pay its bills.”
Board of Supervisors Chairman Gaddi H. Vasquez said the rollover gives the county “a great window of opportunity to continue to work toward an ultimate resolution of this financial crisis.”
Lawyers representing the investors emphasized that the rollover is a temporary Band-Aid, and promised to immediately begin pressuring the county for a repayment plan.
“The agreement was nothing more than a tool in the toolbox--it isn’t a solution,” said Robert J. Moore, lead attorney for the county’s creditors.
“It doesn’t get anybody paid,” added Bennett J. Murphy, the attorney for the bondholders subcommittee. “What it does mean is that the process is going to be less chaotic than if there was a free-fall default, but the problem is just as great as it was before.”
The agencies that issue ratings on municipal debt blasted the rollover, with one promising to downgrade the county’s credit to its lowest level Monday, when the first batch of notes were originally due.
“Unless there is a miracle they will go to D for default on Monday,” said Richard Larkin, managing director with Standard & Poor’s Corp. “I don’t think the county has felt the full brunt of what they have done yet, but I think they will. They will have a tough time borrowing [from Wall Street] again.”
Moody’s Investors Service, which already has the county’s short-term credit at default ratings, said the county’s long-term bonds will probably plunge in ratings next week as well.
“This rollover sends a message to the market and sets a precedent that will hurt Orange County’s ability to borrow in the future,” said Mary Francoeur of Moody’s. “The door to the market keeps closing a little bit every day with the county’s actions.”
Bruce Bennett, the county’s bankruptcy attorney, brushed off the criticism.
“To the best of my recollection, both Moody’s and S & P rated Orange County indebtedness at [their highest] double-A level through November of 1994,” he said Friday. “Their conclusion that the rollover transaction constitutes a default is about as reliable.”
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The deal approved Friday calls for the issuance of $800 million in extension notes that mature June 30, 1996, and replace $600 million in taxable notes due Monday and $200 million in tax-exempt debt due later this summer. Noteholders are to receive about 75% of their old interest rates throughout the coming year, and are promised repayment of the principal in June, 1996.
The remainder of their interest, plus a premium of 95 cents for every $100 invested, is to be paid when the county emerges from bankruptcy.
Bennett estimates that the rollover will cost the county about $29 million extra--about $2.6 million this fiscal year, plus $26 million later.
In a separate side agreement, a handful of noteholders reached an accord with Merrill Lynch & Co., the underwriter for the $600-million note issue, that the rollover will have no effect on any future litigation between the noteholders and the brokerage.
This side agreement had been seen as a key lobbying tool to convince noteholders to extend the debt, but ultimately few investors signed on, wary of a provision in the agreement that prevented them from suing Merrill for nine months.
