Many Brokers Snub New O.C. Bonds : Wall Street: Officials sell $278 million in recovery investments, paying millions more because of the bankruptcy. 'The market punished them quite a bit,' one analyst says.

Many Brokers Snub New O.C. Bonds : Wall Street: Officials sell $278 million in recovery investments, paying millions more because of the bankruptcy. ‘The market punished them quite a bit,’ one analyst says.

By DEBORA VRANA

June 14, 1995 12 AM PT

TIMES STAFF WRITER

COSTA MESA — In a clear sign that Orange County has become persona non grata on Wall Street, the financially beleaguered county was forced to pay a premium of about $25 million as it returned to the bond market Tuesday for the first time since filing for bankruptcy six months ago.

The county managed to sell $278 million of so-called recovery bonds--a key component of its fiscal rescue plan; the proceeds will pay back school districts and other agencies that lost money in the county’s ill-fated investment pool.

But despite the highly attractive returns demanded by nervous buyers, some big money managers chose to boycott the sale, citing questions about whether Orange County will make good on an additional $1 billion in bonds coming due this summer and voicing concern that voters will reject Measure R, the half-cent sales tax increase on the June 27 ballot.

“This was a bond deal on crutches, a bond deal in an iron lung,” said Joe Mysak, editor of the Grant’s Municipal Bond Observer newsletter in New York. “This doesn’t mean Orange County will be able to readily access the market in the future.”

To placate anxious buyers, Orange County propped up its debt with costly security features, including insurance that won the bonds a triple-A rating. The notes will be paid off from motor vehicle license fees collected by the state and never touched by the county.

The county paid about $25 million to borrow the money, much more than normal borrowing costs, officials said. That figure includes $9 million for insurance; about $4.8 million to underwriters, lawyers and financial advisers, and $14 million in above-market interest costs imposed by a wary Wall Street, county officials said.

“No one likes to be punished, but I can’t say it’s surprising,” said William J. Popejoy, the county’s chief executive officer. “I shudder what it would have been like if we had gone there without [insurance].”

Even the insurance--for which the county paid four times the going rate--was not enough for Larry McDermott, who manages a $2-billion municipal bond portfolio for Greenwich Street Advisers in New York.

“We decided not to participate. We’d rather not have Orange County exposure in our portfolio at this time,” McDermott said.

Sold by Goldman Sachs & Co. and A.G. Edwards & Sons, the 20-year recovery bonds carried a 6.10% yield--about 25 basis points, or 0.25 of a percentage point, more than other, similar bond issues. Insured 20-year bonds are trading at 5.85%, according to the Bond Buyer Municipal Index.

“This would not have happened if Orange County had handled this whole thing a little better and not talked about defaulting on its other debt,” said Robert Gore, a municipal bond trader with Crowell Weedon & Co. in Los Angeles. “The market punished them quite a bit. Those Orange County supervisors cost the county millions more in borrowing costs.”

The county plans to go back to the market, possibly as early as next week, with a $150-million refinancing and restructuring of outstanding “teeter bonds,” which are secured by delinquent property taxes the county expects to collect.

Other officials said that the penalty of 25 basis points was expected and that they were pleased the notes were sold at all.

“Buyers were concerned about the way Orange County is treating other debt holders,” said Neil Budnick, a senior vice president at MBIA Insurance Corp., the firm that backed the recovery notes. “If they do not act responsibly in the next few weeks, the market will remember it, either long-term or by charging Orange County expensive penalties in the future.”

Christopher Varelas, a vice president with Salomon Bros., the county’s financial adviser, said future bonds deals will not be easy unless Measure R passes, giving the county a sounder financial footing. “It was extremely expensive to sell these, and it could have been outrageously expensive,” he said.

Goldman Sachs said it collected an underwriting fee of $4.8 million, about 1.75% of the deal, to cover lawyers, financial advisers, other costs and its profit. Typically, underwriters collect 1% of a bond deal. But officials said the complexities involved in selling bonds for a bankrupt entity boosted the price.

“We had good interest from institutions and mutual funds,” said Michael D. McCarthy, a partner with Goldman Sachs in New York. “Some people did not approve of what Orange County has done and took a stance, but there were enough people who felt comfortable with the price that we were able to do it.”

Times staff writers Matt Lait and Jodi Wilgoren contributed to this story.

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