Moody's Comments on Orange County, California Teeter Bond Credit Quality

Business Wire, June 23, 1995

NEW YORK--(BUSINESS WIRE)--June 23, 1995-- Orange County, California, plans to sell $155 million Teeter Plan Revenue Bonds on June 27 through a newly formed Joint Powers Agency, the Orange County Special Financing Authority. The bonds will be secured by an irrevocable direct-pay letter of credit to be issued by The Industrial Bank of Japan, Limited. Although the rating on the bonds will reflect the credit quality of the IBJ letter of credit, Moody's is providing comment on the underlying credit quality of the bonds. As with the Refunding Recovery Bonds sold on June 13, the Teeter Bonds represent another component of the county's attempted recovery plan. Moody's continues to monitor the county's proposals and we will comment on all financings, whether credit enhanced or not, for the implications on the county and more broadly on the public finance market.

Teeter Bond Structure

The county is issuing the 1995 Teeter Bonds in part to refund $175 million of outstanding 1994-95 Taxable and Tax-Exempt Teeter Notes. The balance of the funds needed to retire the notes will come from money available in the existing Teeter Fund. The one-year notes mature June 30, 1995 ($111 million taxable notes and $64 million tax-exempt notes) and were backed by a standby purchase agreement with the Orange County Investment Pool. The county must issue the 1995 Teeter Bonds in order to avoid defaulting on the 1994 Teeter notes. Bond proceeds will also be used to purchase new property tax receivables and to fund in part the Tax Loss Reserve Fund.

Credit Quality of Bonds Issued by Joint Powers Agency Derived from Below Investment Grade Participants

As with other bonds being issued by Orange County, the Teeter Bonds must be examined in the context of the county's bankruptcy. Moody's has stated previously that any new debt obligation of the county would have to be financially and legally insulated from the county to have credit quality above the county's long-term debt rating of Caa. The county has attempted to insulate the Teeter Bonds from the county by selling the property tax receivables to the Authority and having the Authority issue the debt. While this approach does achieve some degree of separation, the county is not making a "true sale" of receivables to the Authority, retains significant control over the Authority, and the county will act as servicer for the receivables. As a result, the Authority is not fully insulated from the current or any future bankruptcy of the county. Therefore, the credit quality of bonds issued by the Authority would reflect the credit quality of the Authority's participants.

Certain elements of the bond structure -- its economics, legal provisions, and the lien provided to bondholders -- do indicate stronger credit quality than the county currently provides to its other long-term debt. However, the exposure to bankruptcy risk results in credit quality, absent the letter of credit, that would be below investment grade for the reasons outlined below.

Teeter Bonds to Be Issued through New Joint Powers Agency

The Teeter program is a method of distributing secured property taxes to local taxing agencies. Participating agencies, which include the county, all school districts, and other cities and special districts who have chosen to participate, receive the full amount of their share of property taxes on the secured roll, including property taxes that become delinquent which are yet to be collected. The county forwards the delinquent taxes to the other entities in exchange for the right to collect delinquencies with interest and penalties. The county issues debt to fund the payments owed to the agencies and repays that debt through the collected tax delinquencies, interest and penalties.

The county is issuing the bonds through the Orange County Special Financing Authority, which is a joint powers authority consisting of Orange County and the Orange County Development Agency. The primary reasons for financing through the joint powers authority are to separate the Teeter Program from the operations of Orange County, and to allow the issuance of longer-term bonds than the county would be permitted to issue itself for this program. Historically, counties were limited to issuing one-year notes to finance the Teeter Plan, but now can issue seven-year debt. There are no limits on the maturity of the bonds if issued by the JPA.

Links between County and Authority Limit Ability to "Bankruptcy Proof"

Although the county intends the Teeter Program to economically self- supporting, there remain significant linkages between the county and the Authority, such that a future bankruptcy filing by the county could impair the Authority's ability to make timely debt service payments.

The Authority is made up of the county and the County Development Agency. The County Board of Supervisors acts as the Board for the both the Development Agency and the Joint Powers Agency. County staff acts as the staff of the Development Agency and will be the staff of the JPA. The county will be the servicer with respect to the delinquent tax payments and the receivables.The county is not making a "true sale" of the receivables to the Authority.