O.C.’s Upcoming Bond Sale Receives Mixed Reviews

Orange County’s upcoming $1-billion bond sale got mixed reviews from two major credit-rating agencies Thursday--a clear sign that Wall Street has not completely forgiven the county for its unprecedented bankruptcy.

Standard & Poor’s Corp. gave a single B, or below investment grade, rating to the securities because of concerns that the county could file for bankruptcy protection again. Moody’s Investors Service Inc. rated the bonds Baa, or investment grade, citing the county’s improved financial position.

“This split by the rating agencies is very unusual,” said Christopher Varelas, an investment banker with Salomon Bros., the county’s financial advisor. “But we think the market will confirm Moody’s stronger rating. This will help lower the costs of issuance and help enhance the likelihood the deal will sell.”

Earlier this week, the Orange County Board of Supervisors approved the sale on June 6 of as much as $850 million in tax-exempt “certificates of participation” that will be secured by county-owned real estate. The sale will enable the county to emerge from bankruptcy protection.

Officials also approved the sale of as much as $150 million in taxable pension bonds.

Although Orange County has purchased special insurance that automatically gives its bonds a stellar triple A rating, county officials asked the two credit agencies to rate its recovery bonds without considering the insurance, hoping to give investors added assurance.

The junk rating from Standard & Poor’s could prompt investors to demand higher returns from the county even though the insurance company would make bond payments should there be a default. Such a demand could make it more expensive for the county to borrow.

Some potential bond investors expressed concern Thursday about what the split ratings may mean. Many on Wall Street are still bitter about Orange County’s bankruptcy filing on Dec. 6, 1994.

With proceeds from its bond sale, the county expects to pay vendors, bondholders and other creditors who are owed money, and officially emerge from bankruptcy June 11.

Moody’s said Thursday that its Baa rating for the certificates of participation is due in part to the county’s efforts to craft a recovery plan that enables it to pay all its debts to bondholders.

But Standard & Poor’s analyst Jane Eddy said that if the county again seeks bankruptcy protection, a special fund set up by the state to protect bondholders might be accessible to others as well and therefore leave bondholders vulnerable.