County Gets OK to Issue Insured Bonds : Bankruptcy: Proceeds will be used to redeem $236 million in recovery warrants given to schools and others. Court ruling means lower interest costs.

SANTA ANA —  In a move that could save taxpayers millions, Orange County gained court clearance Monday to pursue the most cost-effective route for a partial repayment of its debts to schools, cities and others that had money in its collapsed investment pool.

With approval from Superior Court Presiding Judge James L. Smith and U.S. Bankruptcy Judge John E. Ryan, the county now can issue $295 million in fully insured municipal bonds that carry a top-shelf rating, rather than lease-backed Certificates of Participation (COPs) that would likely force the county to pay junk bond interest rates.

“It’s the first and best option,” said the county’s financial adviser, Christopher Varelas of Salomon Bros. “It allows us to pursue and take advantage of the benefits of [bond] insurance. . . . The main advantage of the recovery bonds is the lower [interest] costs” the county will be obliged to pay.

Insured by MBIA Insurance Corp., the nation’s largest municipal bond insurer, the bond proceeds will be used to redeem $236 million in recovery warrants given last month to some 200 investors in the county’s failed pool as part of a court-approved settlement. Varelas said he expects to have cash in hand for pool participants by next Friday.

School districts, for example, were given about 13% of their Dec. 6 deposits in warrants that will be redeemed for cash raised by sale of the bonds. Other agencies will get about 3% of their money back that way.

Pool participants already received about 77% of their deposits back in cash and are scheduled to receive the rest from proceeds of the county’s litigation against Merrill Lynch & Co., as well as from new money-raising schemes of the county, including a half-cent hike in the sales tax on the ballot June 27.

“It’s not the end of the process by any means,” county bankruptcy attorney Bruce Bennett said. “This only gets schools to 90 cents and the rest to 80 cents on the dollar. The rest is dependent on the remaining restructuring plan, including the sales tax.”

MBIA insurance will cost the county about $10 million, which is four times the normal rate. But over the life of the 30-year bonds, having insurance could save the county roughly $100 million it would have to pay in higher interest without it.

“School districts will now receive the funds they need to provide essential services at the lowest possible cost to Orange County taxpayers,” MBIA Senior Vice President Neil Budnick said in a statement released Monday. “We are pleased to be playing a role in both helping the county take this essential first step in restoring its fiscal health and enabling it to significantly reduce the expense of issuing the recovery notes.”

Stan Oftelie, the chief executive of the Orange County Transportation Authority and chair of the bankruptcy committee representing pool participants, said the county’s fulfillment of its promise to turn the warrants into cash “gives great credibility to the county.”

Five people with lawsuits pending against the county had temporarily derailed the county’s plan to issue insured bonds by objecting to the issuance of new debt before their claims were resolved. This forced the county to instead consider issuing lease-backed COPs, which would have been more expensive and harder to sell on the market.

But county officials over the weekend persuaded the five to withdraw their objections, allowing Smith to give required court approval to the new debt Monday morning. With the objections resolved, the county now can issue the insured bonds and sell them in time to repay investors by the deadline outlined in the pool settlement agreement.

“I don’t see any reason to impede the county’s efforts. This is best for the county and for the investors,” said attorney Frank Nunes, who had challenged the new debt on behalf of minors and retirees with money tangled up in the pool. “I don’t want to hurt the county in any way, because I want to see it get stronger and stronger. That’s what’s best for my clients.”

County officials praised the five claimants, as well as County Counsel Terry C. Andrus and his deputy Laurence Watson. “He basically pulled off a miracle,” one insider said of Watson. “He did what no one else had been able to do.”

With the validation on the recovery bonds secured, county officials abruptly canceled a “road show” that had been planned this week to sell the COPs to investors in New York, Boston, Chicago and San Francisco.

Instead, county officials will scramble over the next two days to finalize a prospectus on the recovery bonds. They plan to hold conference calls with investors Thursday, Friday and Monday. Varelas said he hopes the bonds will be priced June 13 and sold June 16.

Although four local school districts have large debt payments due June 13, they have negotiated bridge loans from other agencies to tide them over until the recovery warrants are cashed in. Other school districts need the cash from the warrants by month’s end to avoid insolvency.

Ryan also approved the COPs Monday, so the county has a backup in case some last-minute obstacle arises to fell the bonds. Otherwise, the county may use the COPs to raise money later this summer, Varelas said.

“It’s good that the county is having a success, that the county is actually going to accomplish one of its steps to recovery,” said David Brodsly of Moody’s Investors Services. “They’ve got a long way to go before they’re out of these woods, but progress is progress.”

The switch back to the original plan came on the exact day the county had vowed to make the recovery notes “good as gold” for pool investors.

Because the deal came through so late, county officials gave the pool participants’ committee until June 13 to approve the bonds as an acceptable redemption of the recovery warrants. Approval is all but assured.

“It’s great because it saves everyone money. There’s more money to go around and pay creditors,” said Jon Schotz of Saybrook Capital Corp., a consultant to the committee representing pool participants. “This is a big step for the county in living up to its word. Absolutely it’s great for us, but they’re not doing it because it’s great for us. They’re doing it because it’s great for them.”

Peer Swan, chairman of the Irvine Ranch Water District, was less enthusiastic.

“They’re only doing what they said they were going to do,” he noted. “I’d only be slapping them on the back if we didn’t have to go through any of this at all.”

Times staff writer Susan Marquez Owen contributed to this story.