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Orange County Returns To Market, Sells $295 Million Bond Issue

June 13, 1995

NEW YORK (AP) _ Troubled Orange County made its much-anticipated return to the bond market on Tuesday, finding generally good demand for $295 million of new bonds.

The county’s underwriter, Goldman Sachs & Co., said there was ``very good demand″ for the so-called ``refunding recovery″ bonds, although they admitted not all of the shorter-term bonds were sold.

Richard Kolhman, a Goldman bond underwriter who handled the deal, said he expects the unsold short-term issues to be snapped up by individual investors in the days to come.

Kolhman added that ``a majority of maturities were oversubscribed,″ meaning that demand for most of the bonds exceeded supply.

The sale was the first time Orange County sold bonds since it sought bankruptcy protection last December after suffering a $1.67 billion loss in its investment fund. The loss, caused by a speculative investment strategy that bet heavily on lower interest rates, led to large layoffs within the affluent Southern California county and cost cutting.

Proceeds from the bonds will be used to repay more than 200 cities and school districts that had invested in the fund.

Many municipal bond analysts have been very hostile towards Orange County since the bankruptcy because the county’s voters and former board of supervisors have strongly opposed new taxes to ensure the county’s existing bonds wouldn’t default.

A new half-cent sales tax increase, an important part of the county’s bankruptcy recovery plan, comes before county voters on June 27, but chances of its passage are uncertain. Orange County is a politically conservative area with a strong anti-tax culture.

Some analysts fear that Orange County could cause widespread damage to the muni bond market’s credibility if it allows the existing bonds to slip into default because residents don’t want to pay higher taxes.

Moody’s Investors Service, a major bond rating agency, said failure of the tax increase measure means the county ``does not have a viable plan to repay all its debt.″

Anticipating Wall Street’s displeasure, Orange County paid about $8 million to insure the new bonds against default and win the highest investment grade rating, triple-A.

Even with that insurance, the yield of the bonds ranged from 5.10 percent for 6-year notes to 6.10 percent for 20-year bonds _ about 15 to 20 basis points above comparable issues. A basis point is 1-100ths of 1 percent, a common tool to measure interest rates.

Joe Mysak, editor of Grant’s Municipal Bond Observer, a New York industry publication, said he saw nothing unusual in the pricing, calling it ``right on the money.″

Neil Budnick, senior vice president at MBIA Inc., which insured the county’s bonds, said the county benefited from a unusually strong rally in the government bond market, which pushed up muni yields.

Bob Chamberlain, senior vice president and a muni analyst for Dean Witter Reynolds Inc., saw the pricing as quite high over typical deals.

``It’s a message ... that Wall Street does not like what they’re doing at all,″ Chamberlain said.

William Popejoy, the county’s chief executive officer, said he was pleased with the market’s reception. Popejoy said there were considerable legal and underwriting costs associated with the deal because of its circumstances.

``We’re probably looking at 75 basis point additional cost over what we would have paid prior to bankruptcy,″ Popejoy said. Additional costs at that level are considered large in the bond market.

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