ORANGE COUNTY IN BANKRUPTCY : Officials Propose Extending $1.275 Billion in Debt

In their latest gambit to ease an intensifying cash crunch, Orange County officials on Thursday laid out a proposal to unilaterally extend for one year--at existing interest rates--$1.275 billion in short-term county and school debt due this summer.

But representatives of bondholder groups quickly disputed the need for the so-called rollover and predicted that without the promise of a higher interest payout, the proposal almost certainly would be rejected by most bondholders.

County officials described the plan, which was presented late Wednesday to the county’s creditor committee, as a maneuver to buy time for new revenues to fill the gap caused by the county’s $1.7-billion investment fiasco.

“It’s just an interim step,” said Paul S. Nussbaum, the deputy to county Chief Executive Officer William J. Popejoy. “It’s not a solution by any means. It’s just a step to allow for . . . other revenue sources to kick in.”

Among those revenue sources is a half-cent increase in the county’s sales tax that Popejoy proposed Wednesday--his first acknowledgment that a tax increase might be necessary to close the county’s budget gap.

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Bruce Bennett, the county’s bankruptcy attorney, said individual bondholders would have the right to accept the proposal or insist on their bonds being redeemed on the original maturity dates.

“People who understand the issues, I think, will participate” in the extension, Bennett said.

But creditors’ committee spokesmen interviewed Thursday were decidedly cool to the plan.

“We have not agreed that it is necessary to extend the debt nor to any of the terms,” said Robert Moore, an attorney for the bankruptcy court committee representing bondholders and other creditors. “The committee still expects the county to satisfy its obligations this summer.”

At issue are $600 million in taxable notes floated last year to raise money for the county’s ill-starred investment pool, due July 10; $200 million in tax-exempt notes secured by tax and other revenues, due July 19 and Aug. 10; $175 million in taxable and tax-exempt notes secured by property taxes, due June 30, and about $300 million in school district borrowings guaranteed by the county, due July 28.

The county has argued that its fiscal situation is so precarious that if held to those payoff dates it would risk defaulting on the notes.

Moore and other spokesmen for the creditors, however, said the county’s proposal may violate state constitutional and legal prohibitions on using one year’s revenues to pay off obligations incurred in an earlier year.

An even bigger problem may be the idea of asking current bondholders to accept a rollover without offering a higher interest rate. Since the notes originally were issued, prevailing market interest rates have risen by more than 1 1/2 percentage points--and the sheer risk of investing in Orange County notes has soared immeasurably.

“It would seem unreasonable to us for the county to not adjust interest rates to reflect” those differences,” Moore said.

Rates on the notes are currently set at 4 1/2% to 6 1/8%.

How much pressure the county could place on bondholders to accept the deal as offered is unclear. Under Chapter 9 of the federal bankruptcy code, the county has wide latitude to manage its fiscal affairs, including disposition of pre-bankruptcy debt.

But in order to ensure that it maintains access to the all-important credit markets, the county is likely to try to win approval of at least a majority of its debt holders.

Jeffrey Chanin, a financial adviser to the creditors’ committee, cautioned that the bond market would not look kindly on any attempt to push through the plan unilaterally.

“If the county crams down these bonds,” he said, “it won’t be able to borrow another nickel for the next 20 years.”

Among the largest of the investors the county would have to convince are Charles A. Schwab & Co., which owns $175 million of the $600-million taxable note issue, and Kemper Financial Services, which owns $190 million of the same notes.

Kemper this week sued Merrill Lynch & Co., the issue’s underwriter, for $200 million, asking that Merrill be forced to buy back the bonds on grounds that the Wall Street firm did not disclose terms in the bond contract that reduce their value.

Times staff writers Debora Vrana, Jodi Wilgoren and Lisa Richardson contributed to this story.