O.C. portfolio loses value as U.K. fund teeters

Times Staff Writer

Orange County's latest investments in complex financial deals took a turn for the worse Wednesday when a fund in which the county placed $80 million neared default after a major U.K. bank aborted plans for a bailout.

County officials said they expect the fund to miss a principal and interest payment to another investor today.

That, in turn, would drive down the market value of Orange County's holdings.

County treasury officials said they were in the process of writing down the value of the holdings but did not yet know by how much.

Still, they said they would hang onto the notes in the belief they will ultimately recover the county's investment in full, rather than lose money in a fire sale.

The fund, a $7.15-billion structured investment vehicle named Whistlejacket and backed by London-based Standard Chartered Plc., was forced into receivership last week and had its credit rating slashed.

The O.C. treasurer's office sent a memo to county officials Wednesday assuring them it would be able to meet the near-term cash needs of investors in the county portfolio, noting the troubled investments are held in a longer-term fund.

The treasury invests the cash balances of the county and many local school districts.

The investment in Whistlejacket is a small portion of Orange County's overall $7-billion portfolio. But the county is still feeling the effects of its 1994 bankruptcy and remains gun-shy about financial risk.

The county has invested nearly $850 million in structured investment vehicles, or 14% of its portfolio.

Officials have been nervously watching since Treasurer Chriss Street disclosed in December that $460 million of the county's holdings in such investments faced a potential credit rating downgrade.

In December, as concern grew about the structured investment vehicles and Street fought off an effort to strip him of investment powers, the treasurer assured board members and the public that the county's SIV holdings were "safe, strong and sturdy."

Asked if he stood by those comments Wednesday, Street said: "I made those comments based on the information available at the time.

"The markets are very fluid and there is unprecedented turmoil in the credit markets."

Standard Chartered said Whistlejacket's finances had been hurt by the tightening credit markets, limiting its ability to issue short-term debt. In a Jan. 31 statement, the bank said it was working on a cash infusion to shore up Whistlejacket's liquidity, but last week it was forced into receivership as the market value of the fund's assets continued to decline.

On Wednesday the bank issued another statement saying it was "disappointed" that it was unable to complete a bailout, citing the difficulty of doing so under receivership.

Deloitte & Touche, the consulting and accounting giant appointed to oversee Whistlejacket's receivership, told investors earlier this week that it would temporarily suspend interest and principal payments while it sorts out the fund's finances. Whistlejacket failed to make a payment due Feb. 15. It will fall into default today if it does not make the payment.

Street said he was surprised by Standard's decision to abandon the bailout effort, because other banks have stepped in to shore up their SIVs, and he said that as recently as Monday he was told the rescue was in the works. He stood by the decision to hold the investments and said he is seeking a seat on Whistlejacket's creditors' committee.

"Quite frankly, I'm starting to feel that Standard Chartered actively misled investors," he said.

None of the county's other SIV holdings have been downgraded. One, in which the county invested $50 million, is scheduled to come to maturity today, and officials said they expect to receive the payment with no problems.

Orange County purchased two medium-term notes in Whistlejacket in January and July 2007 totaling $80 million, both of which mature in January 2009. The county has received $2.2 million in interest payments thus far, and was scheduled to receive another $3.3 million in interest payments beginning in April.

Supervisor John Moorlach, the former county treasurer who is now chairman of the Orange County Board of Supervisors, said there was little the county could do at the moment other than monitor the situation. "All we can do at this point is wait for further updates," he said. "I'm certainly not inclined to sell it at a major discount."


christian.berthelsen@ latimes.com

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