O.C. to Tackle Image Problem on Wall Street

Like a scarred and battered prizefighter trying to return to the ring, bankrupt Orange County will head this week to New York, where its financial advisers hope to begin the difficult task of restoring a once golden reputation on Wall Street.

Early indications are that Orange County’s credit rating could improve from its current junk-bond status, although that won’t happen immediately and the county won’t quickly recapture its old, privileged reputation as a blue-chip investment.

Several representatives of Salomon Bros., the county’s financial adviser, will meet with Wall Street credit-rating agencies Thursday and Friday to explain details of the county’s newly approved fiscal plan and seek a more generous evaluation of Orange County’s creditworthiness.

A boost in the credit rating would save the county millions of dollars in extra borrowing costs and flash a green light to investors that it’s safe once again to touch Orange County’s bonds. Just as an individual with a checkered credit history pays more for loans, Orange County now must pay much higher interest rates and offer special guarantees in order to borrow for building roads, buying equipment and keeping government functioning smoothly.

“It’s premature to say whether there will be an upgrade, but clearly that’s one of the things we will be discussing,” said Diane Brosen, a director with Standard & Poor’s Corp., which currently assigns the county’s notes its lowest rating, D, for default. “There are a lot of factors involved in a rating and this is an unprecedented situation.”

For years, Orange County was bestowed a celestial AA credit rating, nearly the highest possible and a signal of safety to bond investors. But its ratings were slashed after a $1.7-billion loss on risky investments forced the county to file for bankruptcy on Dec. 6 and as government officials seemed to flounder and feud in developing a recovery scheme.

With Orange County representing the largest municipal bankruptcy in U.S. history, analysts are breaking new ground as they evaluate the recovery plan and suggest ways to regain fiscal health.

While Christopher Varelas of Salomon Bros. could not be reached for comment Tuesday, a county spokeswoman said the county is “obviously trying to get our bond rating improved. Our financial advisers will be in New York on various meetings this week, some of them with rating officials.”

Another major credit rating agency, Moody’s Investors Service Inc., will also scrutinize the county’s economic health in coming weeks to see if an upgrade is warranted. Moody’s rates the county’s debt Caa, labeling it speculative and placing it one notch above its lowest ranking.

In a report released Tuesday, Moody’s said it will suggest steps the county needs to take to improve its credit rating, now that its recovery plan has been cleared by state legislators and Gov. Pete Wilson has pledged to sign it.

“We’ve been so focused on the recovery plan we want to step back and look at the overall economic conditions in Orange County and the county’s operations,” said Barbara Flickinger, an assistant director with Moody’s in New York.

“It’s hard to say how long it will take for them to get back to investment grade. They’ve made a lot of progress and that certainly is positive for their rating, but they are still in bankruptcy,” she said.

Flickinger and others on Wall Street pointed out that the county’s comeback now hinges on investor reaction to the recovery plan’s backbone: a controversial $520-million bond deal to be paid with tax revenue diverted from various local agencies and backed by remaining county assets such as landfills and major county buildings.

Getting Wall Street to buy these bonds, called “certificates of participation,” is a must if Orange County is to succeed in finally repaying vendors and bondholders who have been stiffed since bankruptcy was declared nine months ago. Although bondholders agreed this summer to forgo repayment of $800 million in bonds they hold, that deal lasts only until next June 30. Those bonds are now considered to be in default.

The new financing, similar to a large home equity loan, will allow the county to mortgage a majority of its remaining real estate assets.

“When all is said and done, they are still going to have to sell at least $500 million of new [bonds] to pay their creditors,” said Zane Mann, publisher of the California Municipal Bond Advisor, a newsletter in Palm Springs. “Who is going to buy it? And will the county pay it back?”

Wall Street will not eagerly embrace more bonds from Orange County, Mann said, questioning the wisdom of mortgaging landmark real estate assets to pay off the county’s current creditors.

“It’s like paying your American Express card off with your Visa and holding your MasterCard in reserve if that doesn’t work out,” Mann said.

The county encountered extraordinary resistance from an angry Wall Street when it tried to borrow in two separate transactions in June. Extra penalties, high interest rates and bond insurance cost more than $20 million--at a time when there was little money to spare.

Even with the enticements, hostile investors turned their backs when Orange County tried to sell $155 million worth of recovery bonds. A majority of the bonds remained unsold after the first day of the deal, an unusual rebuff. The county’s underwriters, responsible for making sure the bonds were sold, had to buy the leftover bonds and peddle them later for whatever price they could get.

Still, other specialists now believe the county’s troubles on Wall Street should abate, although it may have to continue paying penalties and obtaining special insurance.

“At this point in the game, the good thing is that they have got a plan in place,” said Christopher Taylor, executive director of the Municipal Securities Rulemaking Board, an agency that regulates the municipal bond market.

Orange County will be able to successfully borrow money on Wall Street again, Taylor predicted, but he added that for the time being, it will “continue to pay penalties.”

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What Bond Ratings Mean

Bond ratings reflect creditworthiness and investment quality. The ratings, issued by Standard & Poor’s and Moody’s Investors Service Inc., are assigned to local governments and to individual bond issues. A guide to the ratings:

Rating

Moody’s: AAA

Standard & Poor’s: AAA

What it means: Best quality with least degree of investment risk. Interest payments protected by exceptional and stable resources; principal is secure. Rarely assigned.

****

Rating

Moody’s: Aa

Standard & Poor’s: AA

What it means: High grade with slightly lower resources or greater long-term risks than those with AAA rating.

****

Rating

Moody’s: A

Standard & Poor’s: A

What it means: Upper-medium grade with adequate security of principal and interest.

****

Rating

Moody’s: Baa

Standard & Poor’s: BBB

What it means: Medium grade; lacking in outstanding investment characteristics with some speculative characteristics.

****

Rating

Moody’s: Ba

Standard & Poor’s: BB

What it means: Predominantly speculative with only moderate protection of interest and principal payments; long-term position uncertain.

****

Rating

Moody’s: B

Standard & Poor’s: B

What it means: Low grade, speculative; lacking characteristics of a desirable investment.

****

Rating

Moody’s: Caa

Standard & Poor’s: CCC

What it means: Poor quality; may be in default or include other elements of danger regarding principal or interest.

****

Rating

Moody’s: Ca

Standard & Poor’s: CC

What it means: Highly speculative; often in default.

****

Rating

Moody’s: C

Standard & Poor’s: C

What it means: Lowest quality; poor prospects of attaining real investment standing.

****

Rating

Moody’s: None

Standard & Poor’s: D

What it means: In default.

****

O.C. BONDS IN THE BASEMENT

Before the bankruptcy, Orange County’s credit stood solidly on top-rated bonds. Now it must regain the faith of Wall Street. Key events in the county’s bond-rating slide:

* Aug. 21, 1981: Orange County’s general obligation bonds, considered a benchmark of its financial strength, are assigned an Aa1 rating by Moody’s Investors Service.

* Dec. 6, 1994: Moody’s suspends its rating in response to county bankruptcy filing.

* Jan. 6, 1995: County bonds severely downgraded to Caa rating.

* Sept. 15: State legislators approve the county’s recovery plan.

* Sept. 19: Moody’s responds to legislators’ actions by announcing it will review and re-evaluate the county’s credit standing.

Source: Times reports, Moody’s Investors Service

Researched by JANICE L. JONES / Los Angeles Times