O.C.’s $800-Million Bond Deal Earns Wall Street Kudos
Beleaguered Orange County cleared a major hurdle Tuesday in its efforts to emerge from bankruptcy protection, obtaining bond insurance and earning top-notch ratings from Wall Street for an $800-million bond deal.
The county is planning to pledge the bulk of its real estate assets as security for the offering, which enables Orange County to repay all of its obligations to bondholders, vendors and most other creditors and come out of bankruptcy protection by July.
The insurance is expected to entice more Wall Street investors to buy the bonds, saving the county $100 million in interest costs, the county said.
“We’re in the 24th mile of a 26-mile marathon, and these last two miles are going to be the toughest,” said Christopher Varelas, a Salomon Bros. vice president and the county’s lead financial advisor. “But our best scenarios are coming to fruition. It’s the culmination of minor miracles.”
Orange County officials said MBIA Inc., a major insurer of municipal bonds, has agreed to back the $800-million financing. It would be the largest single U.S. municipal financing ever insured by MBIA.
Although the county did not divulge costs of the insurance, sources said the county will pay about $35 million, about three times the market rate. That estimate includes MBIA insuring the $800 million and an additional $120 million in pension refunding bonds, sources said.
“Obtaining insurance . . . is a major step in completing the financing necessary for the county to emerge from bankruptcy,” said Jan Mittermeier, the county’s chief executive.
The insurance earns the county triple-A credit ratings on the debt from Moody’s Investors Service Inc. and Standard & Poor’s Corp.
But even without the added guarantee of insurance, the county said it expects to be awarded investment grade ratings from Moody’s, further reducing borrowing costs and confirming the county’s progress in restoring its fiscal health.
The county’s credit rating was downgraded to noninvestment grade by both Wall Street credit rating agencies after the county filed for bankruptcy protection and posted losses of $1.7 billion.
“The deal is a superb deal. It’s well-planned and well-structured,” said John S. Pizzarelli, manager of MBIA’s Tax-Backed West Department, who said the insurer was impressed with the county’s efforts in 1995 to emerge from the largest municipal bankruptcy filing in U.S. history.
Pizzarelli said the deal’s structure was strong. The county is pledging its real estate, including the Hall of Administration, jails and golf courses to secure the deal. It has also set aside revenue from the state, which will be earmarked to pay off the bonds, and received an agreement by the California Legislature not to reduce those revenue.
“Orange County has had astonishing turnaround since last year. We were very impressed with CEO Jan Mittermeier and the county’s move to cut its budget. It’s evident that they are willing to do the right thing,” he said.
This is not the first time MBIA stepped in help secure an Orange County bond deal. Last May, MBIA insurance was bought to help attract investors to its $279 million of recovery bonds. That issue provided cash to school districts and other municipalities that invested in the county’s portfolio.
The county paid at least $9 million for that insurance--about four times the going rate and less than what it is paying this time-but still had trouble attracting wary Wall Street investors to its bonds.
That is unlikely to happen this spring, analysts said, because the county has a recovery plan in place that illustrates the county’s commitment to making good on its debts to bondholders and other creditors and demonstrates a willingness to pay.
“This guarantees Orange County market access. I don’t think there will be a boycott by buyers. There will be plenty of people stepping up to the plate this time,” said Jon Schotz, of Saybrook Capital Corp., a consultant to the committee representing pool participants.
