O.C. Still Faces Formidable Final Hurdle: Wall Street
Although Orange County’s recovery plan received approval from a Bankruptcy Court judge Wednesday, the county must still win over another judge of sorts: Wall Street.
The county must convince Wall Street investors, many of whom are still bitter about the county’s 1994 bankruptcy filing, to buy nearly $1 billion of its bonds in early June. In order to emerge from bankruptcy, Orange County needs to sell investors $800 million in tax-exempt “certificates of participation,” which will be used to repay bondholders, vendors and other creditors. The county also plans to sell $120 million of taxable pension refunding bonds to repay its creditors.
While most bond traders and investors said they expect that Orange County will be successful, they also predicted that the county will have to pay some extra interest to borrow, even though the county has already reduced costs by obtaining bond insurance.
“There will be a penalty, obviously,” said Steve Kelleher, a bond trader with the investment firm Sutro & Co. in San Francisco. “But I think the time that has elapsed has helped. I might buy it.”
Motor vehicle license fees, sales tax revenue and other fees actually will pay off the $800-million bond issue during the next three decades. But to secure the deal, the county will pledge its real estate holdings--including the Hall of Administration, two golf courses, jails and libraries.
Goldman Sachs & Co. and A.G. Edwards, the county’s underwriters, are planning to sell the bonds around June 6. Orange County and its financial specialists will pitch the securities to large investment funds that buy municipal bonds the week before the sale.
“Orange County is emerging from bankruptcy, and we are confident the county’s credit will continue to strengthen,” said Rich Meister, manager of municipal finance at Goldman Sachs in San Francisco. “The fundamentals of Orange County are very strong. I’m very confident this deal will get done.”
The county will pay MBIA Inc., one of the nation’s largest municipal bond insurers, to guarantee that investors will be paid back, saving the county $100 million in interest costs during the life of the bonds.
The insurance earns the county triple-A credit ratings on the debt from Moody’s Investors Service Inc. and Standard & Poor’s Corp., analysts said. But even without the added guarantee of insurance, county officials said, they expect to be awarded investment-grade ratings from Moody’s later this month, further reducing borrowing costs.
“We’re still waiting for legal opinions that give us confidence that the deal is working the way it’s supposed to work,” said Barbara Flickinger, an assistant director at Moody’s in New York. “The devil is in the details.”
Rating analysts are waiting for legal word that a special fund for the state to set aside money earmarked for the county to pay off the bonds is valid, she said.
