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Insurance Deal Boosts 'Good as Gold' Notes


Bankrupt Orange County found a crutch Monday to help it limp back to Wall Street when the nation's largest municipal bond insurer agreed to back $275 million in recovery bonds needed to repay 200 cities, school districts and special districts that had money in the county's collapsed investment pool.

With MBIA Insurance Corp. on board, the county is planning a "road show" to drum up buyer interest in the 30-year, tax-exempt bonds during the last week in May. Officials expect to sell them June 6 or 7, and promise to reimburse pool investors from the bond proceeds no later than June 15.

Because they will be insured, the bonds will carry triple-A ratings, the highest available. On its own, the bankruptcy-battered county has ratings below investment grade.

"Now that I know there's MBIA insurance, I'm a happy camper. This is wonderful!" exclaimed Jon Schotz of Saybrook Capital Corp., financial adviser to the pool participants. "The county has begun its long road back to recovery. It's their first step back to the bond market. It's the first step in regaining credibility in terms of doing something they said they were going to do."

Under the terms of a deal negotiated over the past two months, the county will pay 1.7% of the total principal and interest on the bonds to MBIA. The premium is as much as four times typical rates, but still far less than the penalty the county would suffer on the market trying to sell bonds without insurance.

The exact amount of the premium depends on the interest rates of the bonds when they are issued next month.

Christopher Varelas of Salomon Bros., the county's financial adviser, estimated the insurance will cost about $10 million but could save the county more than $100 million over the next three decades.

Varelas warned, however, that while the insurance agreement is "a good first step," the deal is unique, possible chiefly because of the "super-priority" repayment status accorded the recovery bonds by U.S. Bankruptcy Judge John E. Ryan.

"I don't want the public to get the impression that this is something we can continue to do," Varelas said. "Unless we identify new sources of revenue, we won't be able to do new financings. This is a onetime situation."

Varelas and County Chief Executive Officer William J. Popejoy stressed that the remaining $475 million in new debt the county hopes to issue this spring depends chiefly on the passage of Measure R, the controversial half-cent increase in the sales tax that will go before voters June 27.

And Richard Lehmann, president of the Florida-based Bond Investors' Assn., criticized the deal as "very shortsighted," saying MBIA should not help the county return to the market until county voters show they will help themselves by passing the tax.

"The message that goes out to the people in Orange County is that there are solutions to their problems, that the industry will find a way to accommodate the county," Lehmann said. "The idea that they provide a release valve to the county, to me, sends out the wrong signal at this point. The county has not yet demonstrated that it's willing to own up to its responsibilities here. In fact, quite the opposite."

Varelas and outside observers acknowledged that, although insurance will help sell these specific bonds, the deal does not erase Orange County's bruised image on Wall Street.

"Clearly, people need to see the triple-A rating is not based on Orange County's improvement, but on MBIA," said Richard Larkin, managing director of the Standard & Poor's bond rating agency.

"People are going to be buying the insurance, not the bonds," added Zane B. Mann, publisher of the California Municipal Bond Advisor newsletter. "As long as it's insured, people say, 'Well, we don't care who issues it.' "

The recovery bonds are the linchpin of a complex reimbursement plan approved by the county, pool investors and Ryan. Under the deal, school districts would receive recovery bonds worth about 13% of what they had in the pool when massive losses sent the county to Bankruptcy Court on Dec. 6.

Cities and other agencies would get about 3% of their investment back in recovery bonds. Varelas said Monday that the county now plans to sell the bonds and give the investors the proceeds, instead of giving them the bonds.

The bonds are in addition to an average of 77% in cash for each investor, which is scheduled to be released Friday.

Without the bond proceeds, several school districts might have been pushed into bankruptcy by the end of June.

"The recovery [bonds] are, for us, life and death," said John Nelson, assistant superintendent of the Orange County Department of Education and the schools' representative on the pool participants' committee. "Survival is dependent upon them."

Other pool participants heralded the news that the county had secured insurance as a long-awaited symbol of the county's trustworthiness.

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