Orange County Poised To Emerge From Bankruptcy Successful Bond Sale Sets Stage For Struggling County To Regain Financial Footing

Orange County sold $880 million in bonds to pay off old debts Wednesday and expects to emerge from the nation’s largest municipal bankruptcy next week.

Orange County is basically borrowing money to pay off loans due this summer. Once it settles the old debts, which the county has already been given an extra year to pay, the county officially exits bankruptcy.

County Chief Executive Janice Mittermeier said the county has demonstrated it is now on solid footing after an 18-month period in which it disrupted the nation’s financial markets with fears of a municipal bond default never before seen by such a wealthy, fundamentally healthy region.

Wall Street extracted an interest-rate penalty as the price of a second chance, but it was within county officials’ expectations. Orange County will have to pay between 0.10 and 0.20 percentage point more than similar long-term, insured bonds from a municipality without a tarnished record.

The refinancing bonds’ maturity ranges out to 30 years, meaning that’s when the borrowed principal has to be repaid. Interest must be paid all that time, though, and the higher interest rate could cost taxpayers more than $15 million over the life of the bonds.

Michael Johnston, a municipal-bond analyst for the Sandler O’Neill & Partners investment bank in New York, said traders described demand as good.

“Some people who hold California municipal debt are dumping some of it to get in on this one,” Johnston said. Among the buyers were several mutual fund managers who bought up to $150 million in Orange County bonds apiece, underwriters said.

Several mutual fund managers said they shied away from buying the bonds because Orange County threatened to default on its debts last year.

Christopher Varelas and Gedale Horowitz of Salomon Brothers Inc., the county’s financial adviser during its 18-month bankruptcy, said the county sold all the bonds it had offered.

“We felt for a long time that when the market really saw what they had, that they would receive us well,” Mittermeier said.

Johnston noted the last time the county tried to sell bonds was just as polls were showing voters would soundly reject a proposed tax increase to solve the county’s bankruptcy. The underwriters had a hard time selling those bonds even after raising the yield by a half percentage point.

“They were right in the middle of the crisis - six months following the bankruptcy problem,” Johnston said. Now, “people are feeling a little more comfortable as to where the county is going.”