O.C. Nears Deal to Delay Repayment of $1 Billion : Bankruptcy: Notes’ holders must approve 1-year rollover, a key part of county’s recovery plan.

COSTA MESA —  Orange County is about to close a deal that would postpone repayment of nearly $1 billion in short-term debts for a year, averting a default that threatened to brand one of the nation’s wealthiest counties a deadbeat borrower.

Bondholders met with county representatives Friday in Los Angeles to forge a settlement that--even as it offers a welcome reprieve to the bankrupt county government--will cost the county nearly a percentage point extra in interest, at a price of more than $9 million.

“It is not concluded, but we believe there will be an agreement by early next week,” said Orange County Chief Executive William Popejoy. “The parties are still trying to work out the arrangements.”

“I think we’re close. I think we’re on about the five-yard line--that seems about right,” said Skip Victor of Chanin & Co., financial adviser to a group of county creditors that includes the holders of the $1 billion in short-term notes coming due this summer.

An agreement would calm the jittery municipal finance market, which since the county’s December bankruptcy filing has issued repeated, loud warnings that every issuer of municipal debt in California--and perhaps beyond--would pay a premium and suffer lingering consequences if Orange County defaulted.

Negotiating the $1-billion debt rollover is one key element of a financial recovery plan that also relies on the new revenues that would be generated if voters approve Measure R, the half-cent sales tax hike that will be on the June 27 ballot, county officials said. “Measure R is critical to provide a revenue stream to repay the bondholders, the schools, the cities and all the other pool participants,” Popejoy said. If the measure passes, the new tax revenues will not begin flowing to the county until late this year or early 1996.

A third component of the recovery plan is $1 billion in new borrowings in the municipal bond market, according to Lee Bogdanoff, one of the county’s bankruptcy lawyers, who testified at a meeting this week of the special state Senate committee investigating the fiscal debacle.

Officials say the rollover deal on the county’s debt is a critical precursor to that new borrowing, along with efforts by schools and cities throughout the state to enter the municipal bond market with new debt issues in the next 90 days.

On Friday, about a dozen attorneys, financial advisers and creditors huddled at the Los Angeles office of Bruce Bennett, the county’s lead bankruptcy attorney, for more than seven hours, haggling over a deal that has been in the works for about two months. The group splintered into smaller side negotiations, then regathered again and again.

The deal would cover five sets of bonds totaling about $975 million. It does not include $299 million of notes issued by the county on behalf of its school districts.

According to the proposed agreement, note holders would receive an extra 95 basis points in interest--95 cents for every $100 in notes--in exchange for rolling over the debt until June 30, 1996. The deal requires the county to give its legal imprimatur to the extension by vowing not to declare the debt illegal at some later date under a state law that prevents governments from issuing debt that cannot be repaid in the same fiscal year.

The county would reserve its rights, however, concerning a portion of the debt--particularly a $600-million taxable note issue underwritten by Merrill Lynch & Co., perhaps the most controversial of the county’s bonds. In hopes of recovering some of its $1.7 billion in losses, the county has a lawsuit pending against Merrill, which besides underwriting bonds, sold the county many of its investments.

While calling the rollover crucial to the county’s short-term fiscal survival, Bennett noted that it would not solve any of the long-term financial problems.

“It’s only a one-year reprieve. Nothing changes,” Bennett said. “The fundamental economics of the case do not change.”

Once the county and the creditors’ committee approve a deal, it still will require the OK of investors holding 90% of the notes.

“It remains to be seen how many of the actual note holders go along,” said a source close to the negotiations.

Opponents of Measure R said the near-agreement on a debt rollover was proof that proponents of the tax increase are exaggerating the seriousness of the county’s financial crisis. Tax-increase supporters are “playing games with the people,” said Carole Walters, a leader of the “No on R” campaign.

Connie Haddad, president of the Orange County League of Women Voters and a co-chair of the “Yes on R” committee, disagreed. “The debt isn’t disappearing,” Haddad said. “The debt is still there, even if there is an extension.”

Haddad said Measure R will pass only if backers are successful in educating the public about the size of the county debt and the lack of revenue to deal with the problem.

Finance officials who have been monitoring the county’s fiscal mess expressed enthusiasm at the prospect of a deal.

“If a rollover is presented and a deal is done, that would at least give some short-term relief,” state Treasurer Matt Fong told the Dow Jones Investor Network.

But California school districts, cities and other municipal bond issuers still face the prospect of paying more to borrow because of Orange County, said Dean Miscyznski, director of the California Research Bureau and an expert on municipal finance.

At a minimum, he said, California issuers can expect to pay a “penalty”; the question is how much. “I keep hearing about 30 basis points [30 cents per $100 borrowed] spread over other issues,” Miscyznski said.

Times correspondent Shelby Grad contributed to this story.