TCR_Public/950320.MBX BANKRUPTCY CREDITORS' SERVICE, INC.



Moody's Evaluates Recent Announcements by Orange County, California;
County's Willingness and Ability to Avoid Default Still in Question



  NEW YORK, New York--March 20, 1995--Recent actions and announcements
by Orange County have contributed to
confusion about the county's intention in
honoring its debt commitments and otherwise resolving its current financial
crisis.  The proposed one year deferral of repayments on short-term general
obligation indebtedness is particularly troubling, as are statements that the
county may seek to invalidate a portion of that indebtedness.  Like the
county's earlier decision not to segregate tax receipts originally pledged for
payment of outstanding tax and revenue
anticipation notes (TRANs)
, the
deferral proposal heightens concern about the county's true intentions and
ability to avoid default.


  The county has a prime opportunity to clarify its intentions to honor its
debt obligations with the recent announcement of a sales tax increase that may
be put to the voters.  Following extensive study of alternatives, the county's
Chief Executive and the county's professional advisors are recommending the
one half sales tax as an essential piece of a recovery plan.  The county
supervisors need to strongly support placing the tax on the ballot and then,
with other county leaders, urge its passage by the voters in June.  The county
must move strongly and clearly in this direction and make the difficult
decisions which can help avoid default.  County leaders need to make much more
explicit that the county's proposed debt deferral does not represent an
alternative strategy, but is an attempt to identify contingencies in the event
that the many pieces of a workout plan may not be finalized in the short time
frame remaining.


  The following comment discusses href="dir.firm.moodys.html">Moody's reaction to these two recent
proposals by Orange County.  In
addition, Moody's has outlined the
complexities of potential solutions to the county's eventual recovery.



Sales Tax Proposal


           The announcement that on March 28 the County Board of
Supervisors will consider placing a one half cent sales tax before
the voters is an opportunity for the county to finally demonstrate
its commitment to solving its financial problems.  Although voter
approval is far from assured, strong approval and unambiguous
endorsement by the Board for the tax increase would send a clear and
positive sign that the county is ready to move forward to resolve its
problems.  This may enable other elements of the workout plan to
coalesce more quickly and help the county win support and cooperation
from key parties, including creditors and the state.


           The Board's rejection, deferral of action, or a decision to put
the issue before the voters but without any leadership endorsement of
the tax increase, would be an indication that there is not yet a
willingness among county supervisors to acknowledge the depth of the
county's problems nor a commitment to avoiding default.


           While a number of potential actions, including budget cuts, a
revenue intercept, leveraging county assets, and seeking state
guarantees, have been proposed, the resolve and leadership necessary
to craft these elements into a workable, comprehensive solution has
yet to be demonstrated.  Because time is short and the details of any
proposal will be legally and financially complex, it is quite
possible that these proposals will not move forward quickly enough to
avoid default on the over $1 billion in debt coming due this summer.


County Debt Extension


           On March 16, the county proposed a mechanism for a one-year
renewal of its short-term bonded indebtedness.  The county expects to
seek bankruptcy court approval of a stipulation approving the renewal
proposal and hopes to achieve consensus among bondholders.  However,
the proposal does not make clear the county's intent.  If the
proposed mechanism represents a forced extension, with holders given
only the alternative of nonpayment, then this proposal should be
viewed as equivalent to default.  If, however, in the face of a
credible workout plan, noteholders are asked to voluntarily extend
their debt and are adequately compensated in order to provide
sufficient time for the plan to be implemented, then setting up a
mechanism for voluntary extension may be a realistic contingency
plan.  Proposal of such a mechanism recognizes that one of the
cornerstones of the county's potential recovery, the one half cent
sales tax, must first gain approval from the Board of Supervisors and
then the electorate.  Even if approved by the Board, gaining voter
approval is highly uncertain and the final outcome will not be known
before June 27, when the earliest election can be held.  A voluntary
extension, accompanied by a plan to provide cash payment to those
noteholders who choose not to extend, may be a realistic contingency
that noteholders find preferable to a payment default.


           Two particularly disturbing elements of the county's debt
extension proposal are the county's plans to reserve the right to
challenge the validity and enforceability of the $600 million taxable
notes and to challenge the allocation of available repayment reserves
among the various note accounts invested in the pool.  These two
provisions constitute a strategy for a future assault on the taxable
notes, as they would allow the county to invalidate the taxable notes
and invade the $481 million now set aside for their repayment to
divert for other uses.  These provisions, if pursued, would totally
undermine any hopes the county may entertain to regain credibility in
the financial community, even if the invaded funds were used to
entirely repay other bondholders.  href="dir.firm.moodys.html">Moody's strongly believes
that  there should be no distinction made among the different classes of
general obligation debt and believes the county must continue to make
all efforts to provide full payment for all its obligations.


County Workout Options are Complicated and Multi-faceted


           The remainder of our report outlines our understanding of the
status of the three major components to a county recovery and
workout plan. The first, allocating pool losses among
participants, appears near final solution. Now the county must
develop a credible plan to restructure its debt and then develop
a means to resolve its short and long-term financial problems.


Pool Settlement Would Be Important First Step


           The settlement of pool losses under consideration provides all
pool participants with approximately 77% of their investment in the
pool in cash.  The county would give participants "recovery notes"
to provide school districts an additional 13% of their investments,
and other participants an additional 3%.  The county would make up
the balance with a combination of debt and claims on future revenues.
The recovery notes, totaling $255 million, would have a senior claim
on county debt service.  It is our understanding that to make the
settlement proposal more attractive, the county is working to assure
that the recovery notes would be truly marketable securities at full
par value.  This may require structuring the notes with a
sufficiently strong legal pledge and source of revenues that would
not only hold up during bankruptcy, but also survive bankruptcy.
Another element may be to seek a guarantee from third parties or
identify one or more key purchasers of the notes.


           On March 17, the Pool Creditors Committee announced that they
have agreed in concept to the settlement.  Final details are being
worked on, and formal agreement will require approval by 80% of the
participants representing 90% of the funds (excluding the county) to
approve the plan.  It is our understanding that it will then take the
bankruptcy judge 30 to 45 days to review and approve or deny the
plan.


           If the settlement is finalized and approved by the federal
bankruptcy court, the county will then know the extent of its
liabilities, available cash, and thus the magnitude of its problem in
repaying debt obligations and restoring funds lost in the pool.


County Cannot Repay Debt Without Significant Restructuring of Obligations


           If the allocation of investment pool losses is settled as
proposed, then the county will have access to its cash but will still
face a substantial shortfall in resources to repay its short and
long-term debt.  To provide full and timely payment, the county will
need to refinance and restructure its debt.  As discussed earlier,
the county may resort to a negotiated deferral of debt service until
a workout plan can be finalized.


           Key to a debt restructuring will be the identification of
credible revenue sources for repayment of debt.  In addition, the
pledged security will need to be valid in bankruptcy as well as under
California statute.  Two major revenue options that have been
discussed are a one half cent sales tax which would free up a like
amount of revenue for debt and claims repayment, and leveraging the
county's solid waste system.  If adequate and reliable new revenues
are enacted, a mechanism for protecting and isolating the revenue
stream may be helpful.  A state intercept of pledged revenues for
debt service is being considered by the California legislature.


           Additionally the bankruptcy court has very strong powers to
approve financings and dedicate revenue sources to debt repayment.
It remains to be seen what approaches the county will use and whether
or not it will take advantage of debtor in possession financing
mechanisms to refinance its considerable obligations.  Because
municipal financings under bankruptcy are virtually unknown, there is
little precedent for how the county should properly structure its
future obligations.  However, to the extent that a workout plan
envisions use of unprecedented revenue sources for unprecedented
purposes, transactions may benefit from seeking judicial validation
as well as approval by the bankruptcy court.  Depending on the
details of the particular proposals, validation may be a requirement
of a rating review.


New Revenue Sources Necessary to Maintain Basic Government
Functions


           The final piece of the restructuring package involves
reestablishing county government as a viable entity.  Although there
will be significant downsizing, the county needs to be able to define
and go forward with essential government functions.  The county's
General Fund has been decimated by the loss of interest income and
the county is proposing severe cuts in its 1995-96 budget.  Using
general revenues to secure new debt will further reduce resources
available to the General Fund.  The restructuring package must
address both the 1994-95 deficit, as well as the structural budget
gap carried into future years.  The new county executive, William
Popejoy, has publicly stated that raising the sales tax is the only
means of completing a package to restructure county government and
meet all obligations to bondholders and pool participants.  A half
cent increase in the sales tax is projected to generate approximately
$134 million annually.  It is difficult to envision a successful
financial recovery without passage of the sales tax, as there would
not be sufficient general fund revenues for the county to support the
additional debt and maintain any semblance of governmental functions.


County Has Limited Time to Implement Workout Solution


           The three elements of the county's restructuring plan are each
essential and need to move forward together.  Neither the county nor
the pool participants can reasonably expect to budget for fiscal
1995-96 without settling the allocation of pool losses.  While it
will be virtually impossible for the county to make full and timely
payment on its debt as currently structured, it is still possible to
put into place a workout solution to ultimately satisfy its
obligations in full.  However, using general revenues to support new
debt without successfully replacing revenues taken from the General
Fund would require the dismantling of most general government
functions.


           If a vote on the sales tax is not successful, the probable
scenario is that the county will default on its debt obligations.
While the county appears to have the potential to generate the
resources required to solve its problems, it remains to be seen if
there is the political will to take painful, necessary steps to solve
its problems in a timely manner.