O.C. Plans to Refinance Pension Bonds to Avert Spiraling Costs

SANTA ANA —  Seeking to avoid a huge debt payment in a few years, Orange County is asking investors to sell back $191.2 million in county pension bonds so it can refinance the debt and ease the burden caused by its historic bankruptcy two years ago.

Because the county has less revenue to repay debts, it can’t afford principal and interest payments on the bonds, which are now at a manageable $32 million a year but will spiral to about $50 million a year by 2000, said a county official and a financial advisor.

As part of the refinancing, CS First Boston, which underwrote the pension bond offering three months before the county’s collapse, will pay $3.2 million to $4 million of the county’s costs for the refinancing.

Investors would get back their principal, accrued interest and a premium of $4 to $40 per $1,000 invested, depending on what year their bonds mature. In return, bondholders tendering their shares must waive any legal action against the New York investment banking firm for any failure to disclose the county’s worsening financial condition. The bankruptcy became the nation’s worst municipal failure.

The waiver “has nothing to do with the county’s position on First Boston,” said Thomas L. Beckett, the county’s interim finance director. “The county isn’t waiving anything.”

The county has sued investment banker Merrill Lynch & Co., accounting firm KPMG Peat Marwick and others over their roles in helping the county with its investments, which produced a loss of $1.64 billion.

The county hasn’t sued First Boston, though insiders say a decision on a lawsuit has been on hold while the two sides negotiate the pending refinancing agreement.

The pension bonds were sold in two issues. The county wants holders of Series A bonds to tender their shares for the refinancing.

The Series B bonds are at the center of a lawsuit filed Wednesday against First Boston by the Securities and Exchange Commission. The SEC alleges that the firm and two of its former investment bankers defrauded investors by failing to disclose the county’s dire financial straits in its offering statement. The company and the bankers denied any wrongdoing, saying they followed all laws and procedures.

The Board of Supervisors on Tuesday approved the refinancing arrangement. The tender offer and the waiver were sent to investors beginning Thursday. The bondholders, mostly big institutional investors, have until Dec. 9 to tender their shares.

Beckett said the county believes the big investors want to cash out because they typically have policies requiring that they hold only investment-grade securities. The pension bonds, once highly rated by Wall Street agencies, now are essentially junk bonds.

Through the refinancing, the county wants to lower its annual payments on the bonds to at least $25 million and, more importantly, keep that yearly payment relatively flat as it repays the debt over a longer period of time.

The county, though, would end up paying much more than it now owes because the payments, which continue until about 2022, would begin to rise 2.5% a year beginning about 2005. The current Series A bonds are scheduled to be paid off in 2004.

Beckett said that unless the county can get enough investors to tender their shares, the refinancing plan will be called off.

The county issued the pension bonds in September 1994, pledging that the county administered investments as security for any default. The proceeds, totaling $320 million, were used to fund the county’s obligations to the Orange County Employees Retirement System.