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Orange County, California, hopes to offer municipal bonds

"Orange County is coming at a perfect time," says a fixed income asset manager. "The market is going to gobble this up easily."

It was once the largest county to file for bankruptcy in U.S. history. Now, Orange County, California, hopes to issue its first long-term bond sale in nearly a decade.

Mickey Mouse (L)rides on a golden Dumbo with Caroline Sunshine age nine, on the Disney 50th anniversary press preview day at Disneyland in Anaheim, CA,
Robyn Beck | AFP | Getty Images
Mickey Mouse (L)rides on a golden Dumbo with Caroline Sunshine age nine, on the Disney 50th anniversary press preview day at Disneyland in Anaheim, CA,

"2006 was when we refinanced our bankruptcy debt, and I think that was the last long-term debt issue that we had," said County Executive Officer Frank Kim. "We don't see a need to issue more debt than is necessary. We have a desire to continue improving the stability of the county financially."

The state's third-most populous county — perhaps best known as the home of Disneyland in Anaheim — plans to sell $68 million in lease-revenue bonds to finance the upgrade of its central utility power facility in Santa Ana. An early estimate suggests the 20-year bonds will be priced to yield around 3 percent. The lead underwriter is Wells Fargo Securities, and the issue's pricing is scheduled for late May.

"Orange County is coming at a perfect time," said John V. Miller, co-head of fixed income at Chicago-based Nuveen Asset Management, which holds about $113 billion in munis. "The market is going to gobble this up easily."

"People will be enormously interested because it's been such a long time since they've issued, and they're in great shape. The taint is gone. It's not one of these situations like Detroit." -Marilyn Cohen, CEO, Envision Capital Management

Miller sees "good cash flow in the market. This is supposed to be the seasonally weak time of year, and all else being equal, we should be seeing some seasonal outflows right now for taxes. And we as an industry are not."

Last week marked the 28th week in a row of inflows into broad-based municipals, according to Thomson Reuters Lipper data. Year-to-date, there have been about $14.4 billion of inflows. Lipper will be releasing updated data later Thursday.

Scott Gorzeman, a Los Angeles-based investment banker on the public finance side of Wells Fargo, said of the inflows: "It's a nice, significant run — and it's confirmation that municipal bonds are a preferred asset class. Seeing these inflows verifies that there's going to be continued demand for the new bond issue such as the County of Orange."

"People will be enormously interested because it's been such a long time since they've issued, and they're in great shape," said Marilyn Cohen, CEO of Envision Capital Management, a Los Angeles-based bond-investment firm with about $400 million under management. "The taint is gone. It's not one of these situations like Detroit."

Orange County's 1994 Chapter 9 bankruptcy filing stemmed from former county Treasurer Robert Citron, who ran a risky investment pool and lost $1.64 billion. Citron was fined and served jail time. Ultimately, bondholders and most investors were made whole after the bankruptcy — and major rating agencies restored the county's ratings to investment grade in late 2000.

"They've been a very solid credit ever since then," said Stephen Walsh, director of U.S. public finance for Fitch Ratings. "They haven't had to go out into the market and try to borrow additional funds because they've been in pretty good shape. So that's reflected in our higher rating on them."

Approximately $24.2 million of bankruptcy debt from Orange County remains on the books. The final payment is expected to happen by the end of June 2017 from bond reserves.

"We wanted to keep the bond offering low at $68 million and not extend it to a higher number or extend it beyond 20 years," said Lisa Bartlett, the Orange County Board of Supervisors chairwoman, who will be voting on the bond sale May 10. "We filed bankruptcy in 1994, and this year and next year we're finally able to pay off all of the bankruptcy debt, so that is something that the board took in consideration."

On Tuesday, the state completed the sale of nearly $1.5 billion in general obligation bonds in a competitive sale. The yield ranged from 0.61 percent for the shortest term to 3.05 percent for the 20-year maturity. The bulk of the issuance — roughly $998.5 million — was for refunding existing, higher-interest debt. In early March, muni investors snatched up the state's $2.95 billion GO bond offering in a negotiated sale, and that had been oversubscribed and increased in size by about $500 million.

"The market's clamor for California bonds provides solid evidence that the market is eager to invest in our state," State Treasurer John Chiang said in a statement Tuesday. His office also noted that this week's transaction was the largest competitive sale of long-term municipal bonds in the U.S. in a single day in more than 25 years.