O.C. to Pledge Key Sites as Bond Security

Orange County has identified major landmark real estate--including the Hall of Administration, two golf courses, jails, libraries and the courthouse in Newport Beach--that it will pledge as security for a massive $800-million bond sale this summer, The Times has learned.

The buildings, which make up the bulk of the bankrupt county’s assets, will essentially be collateral for a borrowing plan that enables the county to repay all of its obligations to bondholders, vendors and most other creditors.

“This is the last major obstacle the county faces before it emerges from bankruptcy,” said Christopher Varelas, an investment banker with Salomon Bros., the county’s financial advisor. “There’s never been a deal like this. It’s one of the strongest deals ever sold in the state of California.”

In the unusual financing, motor vehicle license fees, sales tax revenues and other fees will actually pay off the bonds during the next two decades. But to sell the financing, known as certificates of participation, the county needs to pledge its real estate.

Not included on the list was John Wayne Airport, perhaps the county’s most valuable asset. The facility has too much debt to make it useful in the financing.

Rating agencies, bond insurers and bond investors will be scrutinizing the deal in the next few months, after the county finishes hammering out the details. Goldman Sachs & Co. and A.G. Edwards, the county’s underwriters, will sell the plan to investors in May or June.

Zane Mann, publisher of California Municipal Bond Advisor, a bond newsletter in Palm Springs, said investors would want to be sure the buildings being pledged as security are really important to the county.

“The only power the bondholder has to get their money back is the mortgage on the property,” said Mann.

The certificates are complicated and sometimes controversial because they need no voter approval and are not considered debt under state law. Under a typical certificate financing, a county pledges assets it owns free and clear to investors and then makes payments for continued use of the property until it is eventually repurchased.

Los Angeles County ran into trouble over a similar arrangement. During the past 10 years, supervisors mortgaged or pledged as collateral most of the county’s assets. Supervisors later admitted the deals were a mistake because the county was left with few options to borrow its way out of its current fiscal crisis.

But Orange County’s borrowing is different in that lease payments from the buildings aren’t paying back the financing, Varelas said. Instead, sales taxes and other fees will pay off the bonds.

City leaders and tax advocates said they are glad the county is solving its problems, but wonder if the complicated financing will be solid.

“They better know what they are doing,” said Carole Walters, president of the Orange Taxpayers Assn. “If they lose on this bond, we’ll lose our land and our buildings. Then we really won’t have anything left.”

In Laguna Beach, where the library is likely to be mortgaged, City Councilman Paul Freeman said he was delighted the county was emerging from its troubles.

“I can’t imagine this would affect our library at all,” he said. “The library is very important to us, but we’re glad the county is getting back on its feet.”