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Strapped County’s Emissaries Visit Wall Street, Reception is Cool

March 1, 1996

NEW YORK (AP) _ Officials from Orange County, Calif., are hoping to get an investment-grade rating for $830 million in new debt they plan to issue this spring.

Despite efforts this week to woo folks on Wall Street, it was clear Thursday that there is still more work to be done by emissaries from the county famous for the biggest municipal bankruptcy in history.

``There are some concerns given that a lot of people on Wall Street were burned″ and are looking to ensure it won’t happen again, said Jane Eddy, the Orange County analyst with Standard & Poors Corp.

Orange County officials on Thursday wrapped up a three-day trip to New York where they met with rating agencies, bond insurers and municipal investment bankers.

Many municipal bond analysts have been hostile towards Orange County because county voters refused to raise the sales tax as a way of getting out of the bankruptcy protection it sought in December 1994 when bad investments by the county treasurer resulted in a $1.67 billion loss.

The county was unable to repay the bonds last June and instead persuaded bondholders to give it another year to pay on those debts. The county also needs money to pay raises due to employees whose salaries have been frozen in the financial emergency.

``This debt will be virtually riskless and deserves an investment grade,″ Christopher Varelas, a Salomon Brothers financial adviser to the county, told the Municipal Forum trade group in New York on Tuesday.

``Orange County has demonstrated a willingness to pay through its action. And the financial structure behind these bonds is one of the strongest in the state of California.″

In a telephone interview Thursday, Varelas acknowledged that some investment bankers are ``recalcitrant″ about supporting the offerings, but he said others ``seem to be impressed″ with the county’s efforts to restore its finances.

He said that insurers are being asked to respond to the county by the end of the month, and that the rating agencies are being supplied with the information they would need to make an evaluation. The bonds will be issued by June 30.

Eddy said S&P hasn’t received a rating request from Orange County, and wouldn’t comment on whether her company met privately with county officials this week.

``From our perspective ... certainly the issues we would raise would be the issue of their willingness to pay, given that they entered into bankruptcy and used bankruptcy for some time to shield themselves from investors,″ Eddy said.

``There is a bit of a bad history with the way the county has performed under financial stress,″ she said.

The county is expected to emerge from bankruptcy court in June, shortly after the bond issuance. Still pending is a $2 billion lawsuit against the county’s former chief broker and underwriter, Merrill Lynch & Co.

An investment-grade rating would help keep the county’s future borrowing costs low and increase the likelihood of purchasing bond insurance.

The county issued $295 million in new bonds last June after insuring it with MBIA Insurance Corp. Because of the insurance, Moody’s Investors Service gave its top rating to the bonds.

Joe Mysak, editor of Grant’s Municipal Bond Observer, a New York industry publication, predicted Orange County would be able to proceed with the spring bond offering as planned.

``They’ll probably come to market. They’ll probably sell the debt,″ he said.

But, he said, ``They seem to have taken a very arrogant stance toward the municipal market during this whole process, so I’m a little sour on them.″

Michael Johnston, director of municipal research for for Sandler O’Neill & Partners, New York-based investment bank, also thinks the county will succeed in its mission _ but said the trip to New York is only one journey on a long road ahead: The county is not only hoping for a good bond rating and insurance on the debt, but must also try to figure out how to market the bonds if they don’t get insurance.

``There is no question that theirs is an extremely difficult task,″ he said. ``But I wouldn’t say that it’s an impossible task to accomplish.″

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