Orange County won over a reluctant Wall Street on Wednesday, clearing the final hurdle in its efforts to emerge from the nation’s largest municipal bankruptcy filing ever.
Buoyed by strong demand from both East Coast bond funds and well-heeled California investors, the county sold $880 million of bonds, giving it just enough money to pay back its bondholders, vendors and other creditors.
“We’re very, very pleased,” said Jan Mittermeier, Orange County’s chief executive officer, who flew to New York for the bond sale. “We have been able to overcome this financial blowup.”
Cash from the bond sale will allow the county to emerge from bankruptcy protection Wednesday, just 18 months after it filed under Chapter 9 of the U.S. Bankruptcy Code with $1.64 billion in losses from wrong-way interest rate bets by former county Treasurer Robert L. Citron.
“This marks the end of the bankruptcy,” said Christopher Varelas, a vice president of Salomon Bros., which is advising the county on the sale. “But more importantly, this validates the county’s efforts to limit costs by emerging so quickly and paying all creditors 100 cents on the dollar.”
Still, the exit price was not cheap.
Orange County’s bonds were priced to yield 0.10 to 0.25 of a percentage point more than other similarly rated bonds, meaning county taxpayers paid roughly $43.8 million extra in borrowing costs, according to data from Zane Mann, publisher of California Municipal Bond Advisor, a newsletter in Palm Springs.
In total, the county paid about $60 million more to borrow because of its bankruptcy status. That figure includes higher fees for underwriters who sold the bonds, higher returns to investors and costs of bond insurance.
The county will pay about $784 million in interest costs over the 30-year life of the bonds, Mann said.
“Well, there’s been quite a penalty, but considering what Orange County has done it wasn’t so bad,” Mann said. “And that extra yield probably wiped out any bitter taste in the mouths of bond investors.”
Added security features, such as bond insurance, helped entice investors. Even though Orange County paid about $30 million for insurance, it enabled the bonds to be sold and it saved millions of dollars in extra borrowing costs, county officials said.
Joe Piraro, who manages $2.5 billion of municipal bonds for Van Kampen American Capital in Oakbrook Terrace, Ill., said he decided to buy some of Orange County’s bonds because of the insurance, attractive returns and reports that many individual Californians were buying the bonds in blocks of $250,000 and $500,000.
“Obviously, this county has made some serious mistakes. I’m not saying we forgive them, but over time things change,” Piraro said. “It’s a large county, one of the nation’s wealthiest. Down the road it’s going to be very strong.”
But other investors shunned the sale, saying Orange County bonds weren’t worth the trouble. Many are still embittered by the county’s strong-arm tactics with its creditors and threats to default on some of its bond debt during the bankruptcy.
“They are paying investors a price for what they’ve done, but it’s not a big enough price for me,” said David MacEwen, who manages about $2 billion in municipal bonds for Twentieth Century’s Benham Group in Mountain View, Calif.
“We decided not to lend money to a county that filed bankruptcy even though it wasn’t necessary for them to do so,” he said. “They needed to pay us more for that risk.”
In the chaotic months after the county’s unprecedented bankruptcy filing on Dec. 6, 1994, Orange County slashed its budget and fired workers. Nearly 3,000 county jobs were eliminated and 580 employees were laid off. The discretionary budget was cut by 41%, or $188 million.
County property values dropped, and local home sales fell more than 30% in the months after the bankruptcy. Some county agencies were hit with drastic cuts that mostly hurt the poor.
The Probation Department lost 11% of its budget and laid off 129 workers, and the Social Services Agency, which handles child welfare matters, cut its budget by nearly 30% and laid off more than 20% of its workers.
Still, because of an improving economy, the county expects this year’s $3.4-billion budget to have a $38-million surplus, which can be carried over to the following year.
“I’m delighted that Orange County has emerged from its bankruptcy without a state bailout,” state Treasurer Matt Fong said. “Wall Street seems to be accepting Orange County today. We hope this financing removes the black cloud.”
But Carole Walters, president of the Orange Taxpayers Assn. and a vocal critic of county government, still questions why the county deemed it necessary to file bankruptcy in the first place.
“I’m just scared. I think they did all wrong at the beginning,” Walters said. “The taxpayers here are going to suffer again if these bonds go bad.”
The $757 million of tax-exempt bonds sold by the county Wednesday are called “certificates of participation” and are backed by county-owned real estate, such as jails and the Hall of Administration. The bonds will be paid off with sales taxes and motor vehicle license fees.
The county also sold about $123 million of taxable pension bonds, which will in part refund some outstanding defaulted bonds.
The bonds were sold by underwriters A.G. Edwards & Sons and Goldman, Sachs & Co.
Bond proceeds will be used to pay back investors who bought $800 million of bonds that come due this summer, and vendors who did business with the county and still have not been paid.
“Obviously we’re delighted with this sale,” said Mary Ann Schulte, president of the vendors subcommittee. “These vendors, mostly small-business owners, are very, very anxious to get what they are owed.”
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The Price of Bankruptcy
Because of its unprecedented bankruptcy filing, Orange County paid more to borrow its $880 million. Here is a breakdown:
O.C.'s Normal Taxpayer Category cost cost price tag Interest over life of bonds $784.4 $740.6 $43.8 million million million Insurance for $757 million $21.5 $7.5 $14 of bonds million million million Insurance for $8 $5 $3 pension bonds million million million Underwriters fees $946,000 $681,000 $265,000 Total costs $814.8 $753.8 $61.1 (not including principle) million million million
Source: Zane Mann, California Municipal Bond Advisor