O.C. Pays a High Price to Rejoin Bond Market : Bankruptcy: County takes extra $25-million hit for financing $278-million issue to repay pool investors.
In a clear sign that Orange County has become persona non grata on Wall Street, the financially beleaguered county was forced to pay a premium of about $25 million as it returned to the bond market Tuesday for the first time since filing for bankruptcy six months ago.
The county managed to sell $278 million of so-called recovery bonds--a key component of its fiscal rescue plan--with the proceeds to pay back school districts and other agencies that lost money in the county’s ill-fated investment pool.
For the record:
12:00 a.m. June 15, 1995 For the Record
Los Angeles Times Thursday June 15, 1995 Orange County Edition Part A Page 3 Metro Desk 2 inches; 41 words Type of Material: Correction
Bond chart--Numbers were transposed in a graphic accompanying a story on Orange County’s bond sale Wednesday. The $25 million in extra charges the county paid to sell the recovery bonds breaks down as: $14 million additional interest, $9 million insurance and $2 million extra borrowing costs.
But despite the highly attractive returns demanded by nervous buyers, some major funds opted to boycott the county’s sale on moral grounds, citing questions about whether Orange County will make good on $1 billion of bonds coming due this summer and voicing fears that voters will reject Measure R, a half-cent sales tax hike, on June 27.
“This was a bond deal on crutches; a bond deal in an iron lung. This doesn’t mean Orange County will be able to readily access the market in the future,†said Joe Mysak, editor of the Grant’s Municipal Bond Observer newsletter in New York.
To placate anxious buyers, Orange County propped up its debt with costly security features, including bond insurance by MBIA Insurance Corp. which gave the bonds a triple-A rating. The bonds will be paid off with motor vehicle license fees collected by the state and never touched by the county.
The county paid about $25 million to borrow the money, much higher than the normal borrowing costs, officials said. That figure includes: $9 million for MBIA insurance, which the once highly rated county didn’t need; about $4.8 million to underwriters, lawyers and financial advisers; and a $14-million higher interest rate penalty from Wall Street, county officials said.
“No one likes to be punished, but I can’t say it’s surprising. I shudder what it would have been like if we had gone there without†insurance, said William J. Popejoy, the county’s chief executive officer.
Even insurance--for which the county paid four times the going rate--wasn’t enough for Larry McDermott, who manages about $2 billion in municipal bonds for Greenwich Street Advisors in New York.
“We decided not to participate. We’d rather not have Orange County exposure in our portfolio at this time,†said McDermott, who added that concerns about the tax vote and the county’s talk of defaulting on bonds that come due on July 10 made him boycott the bonds.
“There are two camps in the market on this issue--the people who are taking an ethical stand and not buying and others who will buy if the price is right,†said Steve Kelleher, a bond trader with Sutro & Co. in San Francisco.
Sold by Goldman Sachs & Co. and A.G. Edwards & Sons, the 20-year bonds carried a 6.1% yield, about 25 basis points, or one-quarter of a percent, more than other similar bond issues. That means the county paid about $14 million more in borrowing costs, or $737,000 a year. Insured 20-year bonds are trading at 5.85%, according to the Bond Buyer Municipal Index.
“This would not have happened if Orange County had handled this whole thing a little better and not talked about defaulting on its other debt,†said Robert Gore, a municipal bond trader with Crowell Weedon & Co. in Los Angles. “The market punished them quite a bit. Those Orange County supervisors cost the county millions more in borrowing costs.â€
The county plans to go back to the market, possibly as early as next week, with a $150-million refinancing and restructuring of outstanding Teeter bonds, which are secured by delinquent property taxes the county expects to collect.
Other officials said the 25-basis-point penalty was expected and that they were just pleased the deal got sold.
“Buyers were concerned about the way Orange County is treating other debt holders,†said Neil Budnick, a senior vice president at MBIA, the nation’s largest bond insurer. “If they do not act responsibly in the next few weeks, the market will remember it, either long-term or by charging Orange County expensive penalties in the future.â€
County officials cautioned that the complicated deal was a one-shot financing and that the county does not have easy access to the credit markets. “It was extremely expensive to sell these and it could have been outrageously expensive,†said Christopher Varelas, a vice president with Salomon Bros., the county’s financial adviser, said that future bonds deals will not be easy, unless Measure R passes.
“The success of the financing was due to creative legal structuring and special bankruptcy tools we won’t have in the future,†Varelas said. “Unless we demonstrate a willingness to pay our debt and identify another revenue stream, this is something we can’t do in the future.â€
Popejoy agreed.
“This was a one-of-a-kind deal and can’t be replicated. If Measure R fails we don’t have the money to support other bond deals,†Popejoy said.
Goldman Sachs said it received 1.8% of the deal, or $4.8 million, that will pay for financial advisers, lawyers and underwriting costs. Typically costs of underwriting are 1% of a bond deal, but the complex issues involved in selling bonds for a bankrupt entity boosted the price, officials said.
“We had good interest from institutions and mutual funds,†said Michael D. McCarthy, a partner with Goldman Sachs in New York. “Some people did not approve of what Orange County has done and took a stance, but there were enough people who felt comfortable with the price that we were able to do it.â€
The recovery bonds are part of a bankruptcy court settlement designed to redeem $236 million in warrants to more than 200 investors in the county’s pool. School districts were given about 13% of their deposits--the amount invested in the county pool when it filed bankruptcy Dec. 6--in warrants that will now be redeemed with the recovery bonds. Other agencies will get about 3% of their money that way.
“It’s a big step forward and we are quite pleased,†said Jon Schotz of Saybrook Capital Corp., a consultant to the committee representing pool participants. “We are looking forward to receiving our cash.â€
Participants in the county’s investment pool already received about 77% of their deposits back in cash and are slated to get the rest from proceeds of the county’s lawsuit against Merrill Lynch & Co. and the half-cent sales tax increase on the ballot.
“It’s the beginning of a long journey to restore trust in the county, cities and school districts,†said Orange County Supervisor William G. Steiner.
Times staff writers Matt Lait and Jodi Wilgoren contributed to this story.
* MEASURE OF HOPE: CEO Popejoy makes personal plea to voters for tax hike. A10
* CHANGE OF VENUE SOUGHT: Matthew Raabe’s attorney wants trial moved out of county. B1
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Hole Gets Deeper
Tuesday’s sale of $295 million in recovery bonds cost the county $25 million more than expected. What ran up the tab: Item: Amount (in millions) Added borrowing costs: $14 Insurance: $9 Extra interest: $2 Total: $25 Source: Salomon Bros.
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