O.C. Previews Sale of $900 Million in Bankruptcy Bonds

Orange County leaders and bankers began pitching nearly $900 million of bonds Monday, with investors showing interest while already demanding millions of dollars in extra returns.

Orange County plans to sell taxable and tax-exempt bonds Thursday, exactly 18 months to the day after it filed the nation’s largest municipal bankruptcy. The bonds will allow the county to pay off its bondholders, vendors and other creditors and officially emerge from bankruptcy on June 12.

“We expect a moderate penalty,” said Gedale Horowitz, a senior managing director with Salomon Bros., the county’s financial advisor. “But we have here what we hope is the final act in this very interesting drama.”

Investment bankers in charge of selling the deal said they expect the county probably will pay a higher price to borrow, with many Wall Street fund managers demanding more returns in exchange for taking another chance on Orange County. Still, officials are predicting strong demand for the bonds, which are insured by MBIA Inc. and carry triple-A ratings.

Orange County officials say they are expecting to pay a penalty of up to .15% as punishment for the nation’s largest municipal bankruptcy filing on Dec. 6, 1994.

Penalties could cost the county $30 million or more over the life of the 30-year bonds.

Tom Beckett, director of finance for Orange County, said he hopes to sell the bulk of the county’s bonds with a yield of 6.10% to 6.20%.

But an investor with a major Los Angeles investment fund who said she is interested in the bonds, said she will demand at least a 7.00% return.

“It was good to see the county management team today and hear they are committed to debt repayment,” said the investor, who asked that her name not be used. “But most of my questions were already answered by the bond documents. It looks like a strong deal.”

The county officials were speaking at the first of two investor meetings ahead of Thursday’s offering. The second meeting will take place today in New York, including a conference call with 35 to 40 possible investors.

While most of the meeting was upbeat, Orange County is still smarting from last week’s move by Standard & Poor’s Corp. to give the bonds a junk bond rating. Although, Moody’s Investors Service bestowed an investment grade rating on the bonds, the S&P; rating was unusual.

“We don’t agree with that rating. We don’t agree with that assessment,” said Christopher Varelas, the county’s chief financial advisor.

Instead, Varelas said the county could get low borrowing rates, reducing the expenses paid by the county during the next 30 years. He cited the county’s strong security features, including insurance and a special state fund and a lack of bond supply in the market this week.

“All those forces will triangulate to mean a good rate for Orange County” he said.