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Early Bond Sale Spares O.C. Extra Interest

Securities: County moved offering of recovery notes to Wednesday. Friday's higher rate would have cost taxpayers at least $10 million more during the bonds' lifetime.


SANTA ANA — Orange County's decision to move up its bond sale by one day this week probably saved the county millions of dollars and ensured its recovery from bankruptcy, as U.S. bonds on Friday posted their biggest losses in two months.

Timing is key to getting the best price when selling large municipal bond deals, and the county's bond team moved up the sale of $880 million of recovery bonds to Wednesday because of concerns that the market might sour later in the week.

Their fears were confirmed Friday, when the bond market was jolted by unemployment figures showing that the economy added 348,000 jobs in May, more than double the amount forecast by economists.

Although Orange County was scheduled to sell its bonds Thursday, it might have had to wait until Friday if conditions weren't right Thursday. But, by moving the sale to Wednesday, Orange County sold on one of the last days before an unsettled market.

On Friday, signs of a boom in employment increased concern that the Federal Reserve will soon raise bank lending rates to quell inflation. More spending can create rapid inflation, which hurts the value of fixed-income investments such as bonds.

Within minutes of the employment report, prices on the benchmark 30-year Treasury bond--a rate used to determine the interest charged on many kinds of loans--tumbled about 2 points, or $20 per $1,000 bond, driving its yield to 7.06% from 6.9% last Thursday.

If the county had not moved up the date of the bond sale, "it would have cost taxpayers millions and millions of dollars," said Christopher Varelas, a vice president with Salomon Bros., the county's financial advisor.

"The uncertainty in the market today would have made it much harder to even get the deal done."

Because of these market conditions, the county would have paid at least 0.10 of a percentage point more than the 6.23% that it paid to borrow its badly needed funds to emerge from bankruptcy, Varelas said.

Even at the higher rates, the county might have had trouble enticing nervous investors who shy away from bond purchases when the market is unsettled.

The higher rate would have cost taxpayers at least $10 million in extra interest during the life of the bonds, he said.

Cash from the massive bond sale allows the county to pay back vendors, bondholders and other creditors and emerge from bankruptcy protection.

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