Rating Agencies Split Over O.C. Bonds’ Safety

SANTA ANA —  Orange County’s upcoming $1-billion bond sale got widely mixed reviews from two major credit rating agencies Thursday, a sign that Wall Street has not completely forgiven the county for its unprecedented bankruptcy.

Standard & Poor’s Corp. gave a single-B, or junk bond, rating to the securities because of concerns the county could file bankruptcy again, while Moody’s Investors Service Inc. rated the bonds Baa investment grade, citing the county’s improved financial position.

“This split by the rating agencies is very unusual,” said Christopher Varelas, an investment banker with Salomon Bros., the county’s financial advisor. “But we think the market will confirm Moody’s stronger rating. This will help lower the costs of issuance and help enhance the likelihood the deal will sell.”

Earlier this week, Orange County’s Board of Supervisors approved selling up to $850 million in tax-exempt “certificates of participation,” on June 6 that will be secured by county-owned real estate. It enables the county to end the nation’s largest-ever municipal bankruptcy.

Officials also approved the sale of up to $150 million in taxable pension bonds.

Although Orange County has purchased special insurance that automatically gives its bonds a stellar triple-A rating, county officials asked both credit agencies to rate its recovery bonds without considering the insurance in order to give investors added comfort.

But the below-investment-grade rating from Standard & Poor’s could prompt investors to demand higher returns from the county even though the insurance company will make bond payments in case of default. That demand could make it more expensive for the county to borrow.

Some potential bond investors were concerned Thursday about what the split ratings mean, with many on Wall Street still bitter about Orange County’s bankruptcy filing on Dec. 6, 1994.

“This won’t help. I think the single-B rating will disturb some investors,” said Robert Gore, a municipal bond trader with Crowell, Weedon & Co. in downtown Los Angeles.

“Everyone likes to forgive and forget, but this is money we’re talking about,” Gore said. “Orange County is just walking out of bankruptcy after less than two years. Who is to say they might not walk back in?”

But Joseph Piraro, who manages a $2.5-billion municipal bond fund for Van Kampen American Capital in Oakbrook Terrace, Ill., said the bond insurance will offset any disparity in ratings.

“If the price is right, investors will buy it,” Piraro said. “There is insurance and the county has made a lot of progress toward recovery.”

With proceeds from its bond sale, the county expects to pay vendors, bondholders and other creditors who are owed money, then officially emerge from bankruptcy on June 11.

Moody’s said Thursday that its Baa rating for the certificates of participation is due in part to the county’s efforts to craft a recovery plan that enables it to pay all its debts to bondholders.

But Standard & Poor’s analyst Jane Eddy said that if the county filed another bankruptcy, a special fund set up by the state to protect bondholders would not survive.

“We’re simply saying that another bankruptcy cannot be ruled out,” said Eddy. “We’re also concerned about the condition of the general fund, which we view as vulnerable.”

Indeed, after the bond sale, Orange County will spend 25% of its general fund discretionary revenues just paying off outstanding bonds. The county has very limited means for raising other revenue, S&P; noted.

But some officials criticized S&P; for punishing the county for its bankruptcy filing, questioning whether the rating agency was attempting to make up for too-generous ratings in the past. S&P; rated the bulk of Orange County’s bonds with top-notch ratings, some just months before the county’s bankruptcy filing.

Barbara Flickinger, an assistant director with Moody’s in New York, said the disparity in rating between the two agencies was unusual.

“The fundamental leap we had to make was whether the county would file bankruptcy again, and we determined that was highly unlikely. The county will have a rough road ahead, but we don’t think it will drive them back into bankruptcy,’ said Flickinger.