O.C. Pitches Its Bond Plan to a Skeptical Wall Street

Orange County launched an effort Tuesday to persuade Wall Street to help it borrow the $800 million it needs to get out of bankruptcy, but analysts who attended a New York presentation greeted the plan with skepticism.

The centerpiece of the county’s plan to emerge from bankruptcy is the sale to investors of some $800 million in bonds in May or June. Technically known as certificates of participation, the bonds will be secured by county properties, ranging from the Hall of Administration to libraries and jails. The bonds will be paid off with sales tax and other revenue.

At the presentation sponsored by the Municipal Forum of New York, Orange County Chief Executive Officer Jan Mittermeier and lawyers and investment bankers for the county characterized the plan as sound.

Gedale Horowitz, a Salomon Bros. investment banker advising the county, said it has set aside more than adequate revenue to pay off the new bonds and “the citizens of Orange County have agreed to put the bondholders first.”

But in questions during the session and interviews afterward, municipal bond analysts said the county has some way to go to overcome doubts by investors and firms that sell municipal bonds.

Several of them cited county voter’s refusal last June to approve a half-cent sales tax hike to help pay off the county debt as a sign that the county’s residents weren’t committed to meeting its financial obligations.

They also noted that certificates of participation are a controversial form of financing, and said it wasn’t clear yet that the county is putting up adequate security for the bonds.

Matthew T. O’Grady, a municipal bond analyst with Donaldson, Lufkin & Jenrette, who said he was expressing a personal opinion rather than his firm’s, said after the presentation, “I think they [county representatives] have a long way to go to convince Mom and Pop investors.”

Another Wall Street analyst, who spoke on condition that his name not be used, said firms weighing whether to buy the bonds for customers currently are “intensely skeptical.”

During the trip to New York, the county representatives are trying to give investors as much assurance as possible. They are attempting to persuade a municipal bond insurer to provide insurance for the bonds, in effect a guarantee that investors will be paid.

Neil Budnick, an executive with the Municipal Bond Investors Assurance Corp., said the county’s representatives are due to meet with the bond insurer today, but declined to comment further.

The county is also meeting with the key bond rating agencies in an attempt to secure an investment-grade rating for the bonds. Analysts said that without such a rating the bonds could be difficult to sell.

The county’s existing debt carries a “junk” rating, such as the “Caa” designation given by Moody’s Investors Service.

After the county delegation held a four-hour private meeting with Moody’s Tuesday afternoon, Barbara Flickinger, a Moody’s vice president, said it remained uncertain whether the county would qualify for an investment-grade rating.

She said the county “has made a lot of progress” in solving its financial problems. But she said there were still obstacles to overcome, including the county’s announced plan to omit payments to some holders of its taxable notes. The county has said it will skip payments to securities firms and others it alleges contributed to the county’s collapse into bankruptcy.

She also warned that if a municipal bond insurer gives the county insurance, the risk the insurer would take on might lead Moody’s to downgrade its rating of the insurer. This could make an insurance firm reluctant to give the county insurance.

Still, Chris Varelas, a banker with Salomon Bros., the county’s financial advisor, said he believed the county would be given an investment-grade rating, which could save the county millions of dollars in borrowing and insurance costs.

“It was a very positive meeting,” Varelas said. “We’ve got a good story to tell here.”

The county meets with officials from Standard & Poor’s Corp. today.

The county is resorting to certificates of participation because they don’t require voter approval, and they enable the county to get around financing restrictions imposed by Proposition 13.

During the Municipal Forum presentation, Mittermeier said investors shouldn’t interpret the failure last year of Measure R, the proposed sales tax hike, as a sign that Orange County citizens don’t care about paying off debt.

She said the vote, instead, showed that residents wanted the county to meet its debts by cutting spending rather than increasing taxes.

She contended that county residents strongly back the plan to sell the $800 million in new bonds. “They love this program and want to pay off the bondholders,” Mittermeier said.

Proceeds from the bonds will help pay off about $900 million the county owes to current bondholders and vendors.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Big-Money Moves

Orange County will issue bonds backed by its assets to repay debts from the 1994 bankruptcy. A small share of the money will be raised from sales of assets. Details of the plan:

HOW THE MONEY IS RAISED

* $800 million in bonds

* $60 million in cash from sale of assets and bonds

FUNDING THE BONDS

* Major county properties, including the Hall of Administration, will be pledged as collateral

* $12 million will be diverted annually from Harbors, Beaches and Parks, Flood Control District and County Redevelopment Agency

* $38 million in sales taxes previously earmarked for transit will be diverted annually

WHERE THE MONEY GOES

(amounts in millions)

*--*

Amount Obligation $364 Noteholders 110 Refinance pension obligation bonds 65 Vendors 60 Refinance existing debt 50 Debt service reserve 50 Litigation, mostly against Merrill Lynch 50 Third-party accounts administered by the county, such as trusts 35 Employees 25 Consulting, legal fees related to bankruptcy 22 Contingency reserve 21 Insurance and bond issuance 8 Replenish debt reserves

*--*

IMPACT OF FUND DIVERSION

* Harbors, Beaches and Parks: User fees will increase and fewer improvements will be implemented. Land purchases for new parks will decrease.

* Flood Control District: Maintenance of flood control system scaled back and improvement projects delayed, including some at Prado Dam.

* Redevelopment Agency: Current projects will continue, but all future projects may be shelved.

* Road Fund: Maintenance of existing roads will continue. No funding for new projects.

Source: Orange County