SANTA ANA — A federal judge on Monday rejected a last-ditch attempt to block Orange County's one-year extension of $800 million in short-term debt, while a New York agency that rates municipal securities downgraded the extended notes to a "D" for default, the lowest possible rating.
U.S. Bankruptcy Judge John E. Ryan refused to delay the rollover of the county-issued notes pending an appeal of the extension agreement by a lawyer representing about 200 local government agencies that lost money in the county-run investment pool last fall. But even in rejecting the pool participants' plea for relief, Ryan handed them a small victory, saying he would reconsider legal issues raised during the rollover later in the case.
"It has been a core objective of this county to do as much as it can to preserve its access to the markets," Ryan said as he denied the emergency motion to stop the rollover. "It appears there is still a willingness to give the county the benefit of the doubt here. . . . If I were to stay this order, it would undercut the county's ability to seek the assistance of the market in solving its problems, and I am unwilling to do that."
But while noteholders gave the extension agreement near-unanimous support Friday, Standard & Poor's Corp. took another jab at it Monday, saying the county's failure to repay $600 million in notes originally due Monday amounted to one of the largest defaults by a government agency in history.
"In our view, full and timely payment means full and timely payment. That's just not happening here," said Jane Eddy, a director at S&P. "Unless some miracle occurs . . . there's no visible means for the county to support this debt a year from now.
"If there's a plausible plan put forward for the repayment, we could review the rating," Eddy added, "but there's nothing on the horizon to make us think anything other than that these are at D and staying at D."
Eddy's agency and its main competitor, Moody's Investors Service, consider Orange County's failure to make good on the notes by their original maturity dates to be the third largest government default ever, behind the Washington Public Power Supply System's 1983 balk on $2.25 billion in bonds and New York City's inability in 1975 to fully repay $2.4 billion in debt on time.
Lawyers for the county and the noteholders, however, contend that Friday's vote by owners of more than 99% of the outstanding debt actually avoids a dreaded default that threatened to cause chaos in the $1.3-trillion municipal market.
"The county has demonstrated that it intends to attempt to continue to service those notes," Robert J. Moore, lead attorney for the official creditors' committee, told Ryan during an hourlong hearing Monday. "This rollover is an essential element to the ultimate resolution for all the creditors in this case."
According to the rollover agreement, $600 million in notes due Monday and $200 million scheduled to be repaid later this summer were replaced Monday morning with extension notes due June 30, 1996. Investors would be paid about 75% of their current interest rates throughout the year, and would receive their principal back next June. When the county emerges from bankruptcy, they would get the balance of their interest and an additional 95 cents for every $100 invested.
In addition, the county has promised not to challenge the debt under a provision of the California Constitution that prevents one year's borrowings from being repaid with a future years' revenue.
Patrick C. Shea, chief lawyer for the pool participants, is appealing the extension agreement based on his contention that the county, and the Bankruptcy Court, cannot waive the California Constitution. Shea is concerned about the debt-limitation waiver because it makes the entire $800 million in notes have a higher priority for repayment than at least $500 million still owed his clients.
On Monday, however, Ryan said that in approving the debt-extension agreements, he was simply giving the nod to a specific compromise between the county and noteholders, not making a legal judgment about the debt-limitation issue.
Though he lost his bid for a delay, Shea added: "We actually advanced our case today."