Upgrade bolsters deal for California's Orange County

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Orange County, California, will ride an upgrade to triple-A into the market next week.

The county paid off the last of the debt related to its 1994 bankruptcy earlier this year and received the official order Nov. 8 from the U.S. Bankruptcy Court that closes the bankruptcy case.


“The County of Orange should be extremely proud of its fiscal standing and how we have fully recovered from the 1994 bankruptcy,” said Andrew Do, chairman of the Orange County Board of Supervisors.

Fitch Ratings on Nov. 7 upgraded the county’s issuer default rating to AAA from AA-plus and assigned the lease revenue bonds its AA-plus rating. S&P Global Ratings affirmed the county’s AA-plus issuer credit rating ahead of the sale.

The California Municipal Finance Authority, a conduit issuer, will price $198.2 million in lease revenue bonds Dec. 5 for the second phase of the county’s Civic Center project. The county sold $152.4 million in Series 2017A bonds for the first phase in July 2017 after it paid off the bulk of its remaining bankruptcy-related debt.

Citi is underwriter, KNN Public Finance is financial advisor and Orrick, Herrington & Sutcliffe is bond counsel.

The county in April 2017 approved a four-phase, 18-year plan to create a civic center “superblock” in downtown Santa Ana to improve delivery of county services by grouping related services together.

The first two phases include the renovation of several buildings and new construction resulting in a 390,000 square-foot net increase of government uses within the superblock area.

The proceeds of the lease revenue bonds pricing will fund capitalized interest and project costs for the second phase of the Civic Center project, which includes a 245,000-square-foot, six-story building housing county administrative offices, a board room for the county supervisors with seating for 300 and a below-grade parking structure.

Griffin Structures, the developer, LPA Inc., the architect, and Swinerton Builders, the construction manager, entered into a design-build agreement with the county for the first two phases that includes a $45,000 penalty for any delays beyond the anticipated completion. The county has not contracted for the final two phases yet.

“This is a result of the prudent stewardship by this Board of Supervisors, our past boards and by the dedicated professional staff of the county,” Do said.


Fitch also upgraded the county’s series 2017A $152.4 million in lease revenue bonds issued through CMFA for the first phase. It assigns a stable outlook to the county’s bonds. The AA-plus ratings on the lease revenue debt are one notch lower than the issuer rating, reflecting the slightly “increased optionality associated with appropriation-backed debt,” Fitch analysts wrote.

Orange County has 3 million residents making it the third most populous in the country, according to Fitch. Large employers include one of the state’s largest commercial real estate investment firms, The Irvine Co.; financial companies such as the Blackstone Group; Boeing; and its most well-known corporate taxpayer, The Walt Disney Co., which operates Disneyland in Anaheim.

The county has taken on little long-term debt after its bruising bankruptcy experience.

Beginning in fiscal year 2019-2020, the county will only have three outstanding long-term debt obligations, including the proposed Series 2018A bonds, Suzanne Luster, the county’s public finance director, said in an online roadshow. In addition to the debt issued for the Civic Center, the county had $52.5 million in outstanding debt from its Series 2016 lease revenue bonds issued for its Central Utility Facility as of July 20, according to the offering documents.

The current annual debt service on general fund debt is less than 2% of expenditures, Luster said. The Orange County Employee Retirement System was 72.3% funded as of Dec. 31, 2017 and the OPEB funded ratio is 40% with the 2017 OPEB unfunded actuarial liability of $407 million.

“Several series of general fund supported debt have matured recently along with a required payment to the state, freeing up funds to support these bonds and the lease revenue bonds,” Fitch analysts wrote. “Long-term liabilities including net pension liabilities and overlapping debt, are low relative to the county’s resource base at less than 9% of personal income.

The county’s bankruptcy — though many have looked to it for wisdom on how to weather a bankruptcy — was an anomaly. The affluent county was hit by risky investment decisions that went bad, in contrast with California's three recent high-profile Chapter 9 cases involving cities that had cash flow problems or were weighed down by employee pensions and salaries.

The county entered Chapter 9 bankruptcy December 1994 after its investment pool reported losses of $1.64 billion from highly leveraged positions that unraveled when interest rates rose.

Robert Citron, Orange County's treasurer, resigned in disgrace. He ultimately pleaded guilty to six felonies.

The county made its final bond payments stemming from the bankruptcy last year. Its final base rental payment of $488,398 on lease revenue refunding bonds Series 2005 issued for the county’s bankruptcy was made June 15, 2017. It made its final payment to bondholders of $5.7 million on July 1, 2017. The original debt related to the bankruptcy totaled $1.58 billion in principal and interest.

Once the settlement agreement with the 240 other municipalities impacted was paid off this year, it was able to ask the judge to approve repayment of its plan of adjustment, so it could finally close the door on its bankruptcy.

“The bankruptcy taught the county a hard lesson from which the board instituted controls, oversight and installed fiscally conservative policies through which we have emerged financially with a strong balance sheet and a better ability to deliver the best possible government services," said Shawn Nelson, the Board of Supervisors vice chairman.

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Primary bond market Sell side Bankruptcy Ratings County of Orange, CA California
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