O.C. Will Pledge Prime Holdings to Secure Bonds
Orange County has identified the real estate holdings--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 and land, which encompass the bulk of the bankrupt county’s real estate assets, will serve as 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.”
With the unusual financing, motor vehicle license fees, sales tax revenues and other fees actually will pay off the bonds during the next two decades. But to seal the financing, known as certificates of participation, the county needs to pledge its real estate.
Not included in 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, when the county finishes hammering out the details. Goldman Sachs & Co. and A.G. Edwards, the county’s underwriters, plan to pitch 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 particularly valued by the county.
“The only power the bondholder has to get their money back is the mortgage on the property,” said Mann.
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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.
However, this sort of financing, carried to an extreme, has landed Los Angeles County in trouble. During the past 10 years, supervisors there 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.
Orange County’s borrowing is different, however, 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 anti-tax activists said they were glad the county is solving its problems, but wondered whether the complicated financing would 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 pledged, City Councilman Paul Freeman said he was “delighted” the county was getting out from under its troubles.
“I can’t imagine this would affect our library at all,” said Freeman. “The library is very important to us, but we’re glad the county is getting back on its feet.”
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Among the more visible properties on the county’s list is the Robert E. Thomas Hall of Administration Building in Santa Ana, a 178,960-square-foot building constructed in 1978. The five-story landmark is sometimes referred to as the “inverted pyramid.”
As many as eight of the county-owned libraries will be pledged as well as two 18-hole golf courses in the 640-acre Mile Square Regional Park in Fountain Valley.
Thousands of acres of the county’s park land are going to be included in the deal, according to county sources, including the 7,596-acre Caspers Regional Park, 2,000-acre O’Neill Regional Park and 1,971-acre Laguna Coast Wilderness Park. Not more than 10% of the financing can include parks, Varelas said.
The recently created Harriett M. Wieder Regional Park, named for the longtime former supervisor, is not on the list.
James A. Musick Branch Jail/Honor Farm in Irvine is also being included. So is the Orange County Jail complex in Santa Ana.
The values of the buildings will add up to $840 million or 120% of the bond deal, said Varelas, so that if something happens to one building, such as a fire or an earthquake, another building will cover it.
The buildings backing the sale will be geographically diverse and adequately insured to calm any investor concern about fires or earthquakes, county officials said.
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Analysts from the various rating agencies will be closely watching the deal. Their ratings can mean the difference of millions of dollars in borrowing costs.
“This county has a lot to prove,” said Richard Larkin, managing director with Standard & Poor’s Corp. in New York.
“Frankly, their rating will depend on our assessment of their ability and willingness to pay,” he said. “We have not come to the conclusion that the county has fully demonstrated that. However, we are expecting to review their plans between now and May.”
Larkin said rating analysts will determine the importance to the county of the buildings being leased.
“The buildings are important, because if the county doesn’t make its payments, bondholders would get the buildings,” said Barbara Flickinger, assistant director with Moody’s Investors Service in New York.
While the county is negotiating with major bond insurers such as MBIA, AMBAC Indemnity Corp. and Financial Security Assurance, the county hopes to get top-notch ratings on the deal.
“There’s a lot of money here at stake, hundreds of millions of dollars,” said Varelas.
Orange County was once a stellar AA rating but fell into default status after it filed the nation’s largest municipal bankruptcy on Dec. 6, 1994.
“The county should be rated investment grade” on the bond deal, said Varelas. “Assuming the rating agencies can get past the emotional and philosophical issues, we should and deserve an investment grade rating.”
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With the proceeds, Orange County plans to pay off bondholders whose payments come due in June. Vendor and other claims will also be reimbursed and a $50-million litigation fund will be set up.
The county will spend an additional $21.8 million on pay raises due employees whose salaries have been frozen since the county declared bankruptcy.
The salary boost would make good a 2.5% cost-of-living increase that has been held up since June 1995 and 1.5% merit increases. The raises were included in contracts negotiated before the bankruptcy.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
What’s Behind the Bonds
Most of these county-owned facilities will be offered as security for the upcoming bond sale.All are in Santa Ana, except when otherwise indicated:
General Use
Property: Sheriff-coroner administrative headquarters
Address: 550 N. Flower St.
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Property: County office complex
Address: 1300 S. Grand Ave.
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Property: Robert E. Thomas Hall of Administration
Address: 10 Civic Center Plaza
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Property: H. George Osborne Environmental Management Agency
Address: 300 N. Flower St.
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Property: Sheriff-coroner forensic
Address: 320 N. Flower St.
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Property: Manchester Office Building
Address: 301 The City Drive, Orange
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Property: General Services administrative offices
Address: 14 Civic Center Plaza
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Property: Sheriff/coroner annex
Address: 16 Civic Center Plaza
Specialized Use
Property: Engineering/finance complex
Address: 12 Civic Center Plaza
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Property: Probation Department headquarters
Address: 909 N. Main St.
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Property: Orange County Health Care Agency
Address: 1725-1729 W. 17th St.
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Property: GSA Information Systems
Address: 1400 S. Grand Ave.
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Property: General Services Administration garage
Address: 445 Civic Center Drive
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Property: Peace officers firing range
Address: 1900 W. Katella Ave., Orange
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Property: Sheriff-coroner forensic science
Address: 1071 Santa Ana Blvd.
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Property: Loma Ridge Emergency Operations Center
Address: 2644 Santiago Canyon Road, Silverado Canyon
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Property: Manchester complex/animal shelter
Address: 561 The City Drive, Orange
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Property: EMA construction maintenance yard
Address: 1140 E. Fruit St.
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Property: GSA transportation and storage
Address: 1102 E. Fruit St.
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Property: GSA facility operations maintenance
Address: 1143-1145 E. Fruit St.
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Property: South County sheriff’s substation
Address: 11 Journey, Aliso Viejo
Jail, Detention Facilities
Property: Women’s Central Jail
Address: 550 N. Flower St.
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Property: Probation Dept. Youth Guidance Center
Address: 3030 N. Hesperian St.,
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Property: James A. Musick Honor Farm
Address: 13502 Honor Farm Road, Irvine
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Property: Central Jail Intake/Release Center
Address: 550 N. Flower St.
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Property: Men’s Central Jail
Address: 550 N. Flower St.
Courts
Property: Central Orange County Municipal Court
Address: 700 Civic Center Drive West
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Property: Harbor Municipal Court
Address: 4601 Jamboree Ave., Newport Beach
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Property: West Orange County Municipal Court
Address: 8141 13th St., Westminster
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Property: North Orange County Municipal Court
Address: 1275 N. Berkeley Ave., Fullerton
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Property: South Orange County Municipal Court
Address: 30143 Crown Valley Parkway, Laguna Niguel
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Property: Federal Courts Facility
Address: Flower Street/Santa Ana Boulevard
Library Branches
Property: Los Alamitos-Rossmoor
Address: 12700 Montecito Drive, Seal Beach
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Property: Stanton
Address: 7850 Katella Ave.
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Property: El Toro
Address: 24672 Raymond Way, Lake Forest
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Property: Laguna Beach
Address: 363 Glenneyre St.
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Property: Irvine-University
Address: 4512 Sandburg Way
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Property: Dana Niguel
Address: 33841 Niguel Road, Dana Point
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Property: Crown Valley
Address: 30341 Crown Velley Parkway, Laguna Niguel
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Property: Santa Margarita
Address: 30921 La Promesa, Rancho Santa Margarita
Research and Development
Property: Social Services facility
Address: 2000-2020 W. Walnut Ave.
Land
Property: Joplin Ranch
Address: Rose Canyon Road
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Property: Vacant land, Westminster Civic Center
Address: 13th Street
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Property: Thomas F. Riley Library site
Address: Pacific Park Drive, Aliso Viejo
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Property: Manchester complex
Address: 431 The City Drive, Orange
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Property: Talbert Regional Park site
Address: Victoria Street, Costa Mesa
Golf Courses
Property: Mile Square
Address: 10401 Warner Ave., Fountain Valley
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Property: David L. Baker Golf Center
Address: 10401 Edinger Ave., Fountain Valley
Parks
Property: Aliso/Wood Canyons
Address: Alicia Parkway, Aliso Viejo
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Property: Caspers Regional
Address: 33401 Ortega Highway
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Property: O’Neill Regional
Address: 30892 Trabuco Canyon Road
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Property: Whiting Ranch Wilderness
Address: Santiago Canyon Road
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Property: Laguna Coast Wilderness
Address: Laguna Canyon, Laguna Beach
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Property: Riley Regional
Address: Coto de Caza Drive, Rancho Santa Margarita
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Property: Santiago Oaks Regional
Address: Windes Drive, Anaheim Hills
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Property: Peters Canyon Regional
Address: 10500 Peters Canyon Road, Orange
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Property: Weir Canyon Regional
Address: Serrano Avenue, Anaheim Hills
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Property: Yorba Regional
Address: 7600 E. La Palma Ave., Anaheim Hills
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Property: Featherly Regional
Address: 24001 Santa Ana Canyon Road, Yorba Linda
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Property: William R. Mason Regional
Address: 18712 University Drive, Irvine
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Property: Laguna Niguel Regional
Address: 28241 La Paz Road, Laguna Niguel
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Property: Irvine Regional
Address: 21401 Chapman Ave.
Source: Orange County
