Rating Agency Won’t Upgrade O.C.'s Bonds : Credit: Standard & Poor’s notes progress toward fiscal health but cites concerns about lawsuits, continuing pressures.


Despite recent efforts by Orange County leaders and business executives to persuade Wall Street otherwise, a major credit rating agency said Thursday that it will not upgrade the county’s rock-bottom rating in the near future.

Although noting that the county has made some progress toward fiscal health, including winning state approval for a critical bankruptcy recovery plan, Standard & Poor’s Corp. said the county remains a “speculative grade investment.”

The rating agency cited concerns about the county’s ability to sell more bonds, future lawsuits and pressures on the county’s general fund.

“Orange County has nowhere to go but up,” said Jane Eddy, director of public finance for Standard & Poor’s, which currently rates the county’s notes “D” for default and takes periodic looks at the county’s credit quality. “But there are certain hoops they still have to jump through.”


Before higher ratings are restored, the county must emerge from bankruptcy and show a willingness to pay back note holders and vendors who have been stiffed since bankruptcy was declared 10 months ago, Eddy said.

County officials said they were not overly concerned by Standard & Poor’s comments. The lack of an upgrade would have no immediate impact on prices of the county’s bonds, which are already at low levels, they said.

“We’re not ready to get an upgrade,” County Chief Executive Officer Jan Mittermeier said. “When we emerge from bankruptcy, it will be a different story.

“I took [the Standard & Poor’s action as] more positive than it sounds,” Mittermeier added. “We’ve done the right things, and we’re doing the right things.”

Todd Nicholson, president of the Orange County Business Council, said he was disappointed by Standard & Poor’s decision, however. The council sent a team of executives to New York last month to tout the Orange County economy to Wall Street bankers, rating analysts and financial publications.

“Based on the strength of our local economy, we certainly deserve an upgrade,” he said. “But based on where the county is in its restructuring process, I guess it doesn’t surprise me.”

For years, Orange County enjoyed an AA credit rating, one of the highest possible and a signal of safety to bond investors. But its ratings were slashed after a nearly $1.7-billion loss on risky investments forced the county to file the largest municipal bankruptcy in U.S. history.

The key to the county’s recovery, the rating agency said, is a $500-million bond issue the county plans to sell next spring to pay back vendors and bondholders.

The bonds will be paid back with transportation and other fees diverted from local agencies under the bankruptcy recovery plan. To secure the deal, the county also will mortgage most of its remaining real estate assets, including jails and landmark county buildings such as the Hall of Administration.

If major rating agencies bestow a high quality rating on the badly needed bond deal, it would save millions of dollars in extra costs the county would otherwise have to pay in insurance and added interest to entice investors.

At Moody’s Investors Service Inc., analysts said they had no plans to upgrade the county’s overall bond rating in the near future. Moody’s currently rates the county debt Caa, a speculative rating intended to warn bond investors.

“Our energy now is on looking forward to this mega financing they’re planning,” said David Brodsly, an analyst with Moody’s in San Francisco. “There are reasons to think it could be an investment grade rating. We’re just not sure.”

Eddy said analysts at Standard & Poor’s also were scrutinizing the deal to see if they could give the issue an investment grade rating, which signals safety to investors. “We’re not sure if it’s investment grade yet,” she said.

Zane Mann, publisher of the California Municipal Bond Advisor, a Palm Springs newsletter, said the county’s ability to recover its rating will hinge on whether it can sell the spring bond issue.

“What [the rating agencies] are saying is they’ll believe it when they see it,” Mann said. “They want to see if the county can sell this bond deal.”