O.C. Nears Deal to Roll Over $1 Billion in Short-Term Debt : Bankruptcy: If finalized, the settlement will postpone repayment for a year and avert default, for a price. A sales tax hike will still be needed, officials maintain.

Orange County is about to close a deal that would postpone repayment of nearly $1 billion in short-term debts for another year, averting a default that stirred fear within the $1.3-trillion municipal finance industry and threatened to brand one of the nation’s wealthiest counties a deadbeat borrower.

Bondholders met with Orange County representatives in Los Angeles on Friday to forge a settlement that, even as it offers a welcome reprieve to a bankrupt local government, will cost the county nearly a percentage point more in interest for an overall price tag of $9 million.

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

Orange County declared bankruptcy Dec. 6 after trading losses of $1.7 billion caused the collapse of the county’s investment pool.

The agreement will calm the jittery municipal finance market that has warned everyone this week--from Gov. Pete Wilson and the California Legislature to officials in Orange County--that issuers of municipal debt throughout California and perhaps beyond would pay a penalty and suffer lingering consequences in the case of debt default.

Even with a debt rollover plan, county officials note that the $1 billion in debts currently due to expire this summer must be paid off eventually, and they are hoping a half-cent boost in the sales tax will provide money to facilitate that. A hotly contested county sales tax initiative slated for a June 27 special ballot, if passed, would provide new tax revenues early next year.

Tax opponents, who now seem to constitute a majority of voters, have argued that county government can find money elsewhere by cutting its budget more aggressively, selling assets or turning over services to private enterprise.

New tax revenues still form a critical part of the county’s recovery plan, officials insist.

“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.

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 some two months. The group splintered into smaller side negotiations, then reconvened again and again.

“We’re closer, but we’re not quite there,” said Bennett. “There’s only one remaining economic issue of consequence.”

The deal concerns five different debt issuances 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 $9 million in exchange for rolling over the debt until June 30, 1996, although the cost to the county this year would only be about $2 million. The deal also requires the county to legally approve the extension, vowing not to declare the debt invalid later under a California state law that prevents governments from issuing debt that cannot be repaid in the same fiscal year.

“They have to approve the rollover in exchange for validation,” Bennett said.

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 investment losses, the county has a lawsuit pending against Merrill, which besides underwriting bonds sold the county many of its investments.

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Bennett and Chris Varelas of Salomon Bros., the county’s financial adviser, said the cost to the county will hit next year when the extension ends, because monthly payments in the meantime will be at the same level as interest earnings on the reserves being held to pay off the bonds.

“The impact on the general fund is minimal,” Varelas said.

Bennett and Varelas said the rollover is crucial to the county’s short-term survival, but does not actually solve any long-term problems.

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

To pay off the notes a year from now, they said, the county needs new revenues--particularly those anticipated by Measure R, the controversial half-cent hike in the sales tax.

“It just buys us time,” Varelas added. “This gives us breathing room to take the Measure R revenues and get the necessary financings. If Measure R doesn’t pass, a year from now we’ll be right back where we were.”

Once the county and the creditors’ committee approve a deal, it would still require approval of investors holding 90% of the notes. “It remains to be seen,” the source said, “how many of the actual note holders go along.”

Skip Victor of Chanin & Co., financial adviser to the creditors’ committee that includes the note holders, “I think we’re close. I think we’re on about the five-yard line.

“It’s a whole package deal,” Victor said, declining to offer specifics about what needed to change to make it final.

Carole Walters, a leader of the “No on R” campaign, said the apparent extension in the debt repayment proves that Measure R backers are exaggerating the seriousness of county’s financial crisis.

Walters said that Measure R backers are “playing games with the people” by claiming that the county will face dire consequences if the debts aren’t paid by their deadline.

Connie Haddad, president of the Orange County League of Women Voters and a co-chairwoman of the “Yes on R” committee, said the sales tax increase is still needed even if the county is successful in gaining an extension.

“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.

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Friday marked the first time that schools, cities and other government agencies that had money in Orange County’s collapsed investment fund were shown the rollover deal and were on hand to negotiate. While the pool participants are not a party to the agreement, and it can move forward without them, their involvement could help stave off objections to the deal once it lands in court.

Jon Schotz of Saybrook Capital Corp., the pool committee’s financial adviser, said he had not yet fully examined the draft document, and could not comment specifically about its effect.

Under a separate deal approved earlier this month by U.S. Bankruptcy Judge John E. Ryan, local agencies that invested in the county’s pool received about 77% of their money back in cash Friday. They are scheduled to get another chunk next month when the county sells new so-called “recovery bonds,” but the rest will remain as unpaid claims in the county’s larger bankruptcy case.

“What our committee cares about is how the note rollover impacts the status of our claims and that no one slides ahead of us,” Schotz said.

Popejoy expressed some sympathy for the plight of those who bought bonds issued by Orange County.

“The bondholders as a group have a right to be upset,” Popejoy said. “They bought top-rated securities and now have to worry about being paid. We intend to, and it’s just a matter of doing so.”

Paul Nussbaum, the top adviser to Popejoy, dismissed earlier reports that the deal had been concluded.

“It’s been my experience that a deal’s not consummated until it’s consummated,” Nussbaum cautioned. “You can’t handicap these things,” he added, saying any number of hitches might still develop.

Nussbaum described the committee negotiating the extension as “not the most cohesive of committees,” but he acknowledged that significant progress has been made.

Supervisor William G. Steiner said Friday the board is aware of the negotiations but is not privy to details.

Another 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 existing 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.

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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 hearing in Sacramento this week, mutual fund managers said they either weren’t going to buy California debt or would only be willing to buy with insurance.

At a minimum, Miscyznski said, issuers can expect to pay a “penalty” but the question is how much. He cited speculation that California borrowers would pay an extra 30 cents for every $100 borrowed.

While that won’t pinch too severely, when added to the billions borrowed throughout the state, it amounts to a burden in the millions.

California municipal debt issuers can also expect to pay more because investors are demanding higher levels of insurance, either in the form of bond insurance or in so-called enhancements such as letters of credit that could be tapped in the event of default.

“The Orange County bankruptcy has raised substantial issues about the priority and security of those [bond] liens,” Miscyznski said.

Richard Larkin, a managing director of bond rating agency Standard & Poor’s, told the Senate committee this week that a debt rollover may restrict Orange County’s ability to borrow, but a default might preclude it altogether.

“How long will it take to repair an abrogation of trust and confidence?” he asked. “I can only say a long, long time.”

Times correspondent Shelby Grad contributed to this report.

* DOUBTS UNEXPRESSED: A warning about the pool never made it to officials. A16