Rating News: Moody's Views Orange County's Proposed
Extension of Notes as a Default
NEW YORK, NY--July 5, 1995--Orange
County's plan to extend the maturities on some of its notes due this summer
received bankruptcy court approval on Tuesday, June 27.
Noteholders will vote by July 7 on whether to accept the
It appears that the county's perspective is to seek the
extension because it does not have the resources to fully repay the
noteholders at this time. Thus, the rollover, which would affirm
the county's obligation on the notes, is an effort at accommodating
the municipal market to maintain access for the county. It is
important to note that the county, because it is in bankruptcy, is
under no obligation to make payment on the notes by the stated due
dates. From Moody's perspective, the county's affirmation of its
obligations should be unconditional and outside the terms of an
extension agreement. An extension agreement should be intended to
compensate creditors for their consideration.
If the county had offered noteholders a voluntary workout plan
that adequately compensated those who accepted an extension and
offered others payment from available cash, it could have
represented a realistic contingency in the attempt to gain order
during a difficult period in the county's bankruptcy. Instead, as
discussed below, the county is agreeing that payment on the notes is
not limited to revenues from fiscal year 1994-95, in contrast to the
state constitution's debt limitation provisions. But the county
offers no significant compensation to noteholders for extending the
maturity and the county's waiver may still be subject to challenge.
The county, in effect, is attempting to pressure noteholders to
accept extension through the threat of nonpayment.
In addition, the county has not identified any potential revenue
streams to repay the debt next year. The half cent sales tax vote
failed on Tuesday, and expected increased revenues at the county's
landfill through imported garbage are unlikely. These revenue
streams would have supported debt that could have financed a means
by which to pay noteholders next year. Now the prospects for an
economically sufficient plan remain dismal for the coming year.
The following is a review of the evolution of the extension
agreement, its terms and its shortcomings.
The county has $800 million in short-term notes due in July and
August that would be affected by the rollover, comprised of $600
million Taxable Notes due July 10; $169 million Tax and Revenue
Anticipation Notes, Series A, due July 19; and $31 million Tax and
Revenue Anticipation Notes, Series B, due August 10. The Taxable
Notes were issued to provide arbitrage earnings to the county as a
source of operating revenues; the Tax and Revenue Anticipation
Notes were issued to finance the county's cash flow requirements
for the 1994-95 fiscal year. The county has other notes not
affected by the agreement which it expects to repay from various
sources. Teeter Notes, due June 30, are expected to be repaid with
the proceeds of Teeter Bonds sold this week; Pooled TRANs are
expected to be repaid with the money school districts have set
The county's dilemma from the pool's losses was twofold: the
investment income it expected for operations has not been realized,
and the money set aside to repay some of the notes was reduced by
the investment losses. In sum, the county does not have the
resources to meet its financial obligations at this time, including
the payment obligation on the notes.
With the filing of the bankruptcy and loss of investment income,
the county elected to not make set asides as promised when it sold
the Series A&B TRANs. This action was contested by the noteholders,
but was upheld by the bankruptcy court. Thus, while funds would
have normally been set aside for TRAN repayment throughout the
fiscal year as revenues were collected, no post-petition set asides
were made by the county. Only $29 million in pre-petition set
The Taxable Notes were issued by the county to provide money to
generate investment income. The proceeds of the Taxable Notes were
invested in the Orange County Investment Pool, and were thus
decimated by the pool's losses. The investments made with the
proceeds of the Taxable Notes, which were specifically intended for
note repayment, were valued at $429 million when the pool was
liquidated in late December, well below the $600 million principal
After protracted negotiations, the county's final proposal seeks
noteholder approval of the following:
The interest payments would be an administrative expense of the
bankruptcy, which would provide them with a higher priority to some
other creditors. However, any payments yet to be made remain
subject to a later attack or renegotiation under the bankruptcy
In addition to the terms of the extension, the agreement and
related documents addressed several legal issues. Key among these
issues is the treatment of the extended short-term notes under
California's debt limitation laws.
The County's Waiver of Right to Assert Constitutional Debt
Limitations May Still Be Subject to Challenge
California law limits a local government's ability to incur
obligations in one fiscal year that would be satisfied from income
and revenues derived in future fiscal years. With certain
exceptions, expenditures in any given fiscal year cannot exceed the
resources available in that fiscal year to pay them. The issuance
of short-term notes does not fall within that debt limitation
because the revenues available during the fiscal year are expected
to be sufficient to repay the notes.
The county has posited that its lack of resources for fiscal
1995 resulting from the investment losses may be interpreted as a
loss of security for the notes issued during the year. The county
has suggested that, given that the revenues for 1995 may be less
than the potential expenditures - operating costs and repayment of
TRANs - the county would be violating the debt limitations to carry
over any liabilities into subsequent fiscal years.
As part of the stipulation, the county "agrees that each of the
issues of the note debt . . . shall constitute a valid, fully
liquidated and non-contingent, undisputed and enforceable claim
against the county." It goes on to state that the county waives and
releases all defenses and objections to any of the debt under the
Bankruptcy Code or related to the application or operation of the
state debt limitation provisions.
Basically, the county is saying to noteholders, "If you agree to
extend for a year, we will agree that you have a valid claim not
subject to the debt limitation." However, while the bankruptcy
court has approved the county's waiver of these rights, another
interested person, such as a taxpayer, could seek to invalidate the
obligation as a violation of the constitutional debt limitation.
County Maintains Right to Repudiate the Taxable Notes
More troubling than the coercive nature of the extension
agreement and the potential for third party objection is the
county's insistence on retaining the right to seek to invalidate
some of the obligations it is presently asking holders to extend.
Specifically, the agreement would enable the county to retain the
right to contend that the Taxable Notes did not constitute a valid
and enforceable obligation of the county at the time of issuance.
We find the county's attempted retention of this right in the
context of an extension agreement to be unacceptable. Such action
would set a dangerous precedent that would affect all California
Noteholders are faced with the following, limited choices:
accept the county's proposal, and have the county acknowledge some,
but not all, of its obligations; or reject the county's proposal
with the likelihood of default and litigation. Even with approval
of the agreement by noteholders, given the county's lack of
resources and retention of rights to repudiate the Taxable Notes,
litigation may ensue.
The county could have demonstrated a good faith effort toward
noteholders by releasing the accumulated reserves toward repayment
of the notes. Instead, the county has chosen to retain the note
reserve possibly to use the money for other county purposes or to
reallocate among creditors. The extension merely offers noteholders
what they already had, a pledge of the county to repay the
obligations when due. The extension, as proposed, would be, in
effect, a default on these obligations.
CONTACT: Moody's Investor Service, New York
Mary Francoeur, Assistant Vice President, 212/553-7240,
Karen S. Krop, Assistant Vice President, 212/553-4860,
Barbara J. Flickinger, Vice President and Assistant
Director Manager, Far West Regional Ratings,
Katherine McManus, Vice President and Assistant Director,
Manager, Legal Analysis Group, 212/553-4036
COLUMBIA GAS DEVELOPMENT ANNOUNCES DISCOVERY WELL IN NORTH DAKOTA
HOUSTON, Texas--July 5, 1995--Columbia Gas Development
Corporation, the Houston-based exploration and production subsidiary
of The Columbia Gas System, Inc. (NYSE: CG),
announced today that an exploratory well (Hondl well No. 15-1) in the Lodgepole oil
play in Stark County, North Dakota, has found reserves of oil and natural gas.
The Hondl well encountered the carbonate reservoir at a depth of
almost 10,000 feet. The well was drilled 80 feet into the oil
bearing reef and cased after the drill stem test showed the presence
of oil and natural gas. Subsequent drilling on this reef will
determine the total thickness of the oil column.
Columbia Development said the Hondl discovery well, which is
more than three miles from other successful wells, represents a
significant extension to the known productive area of this prolific
new oil play. The company expects to participate in additional wells
in the Lodgepole play during 1995.
Columbia holds a 50 percent working interest in the Hondl
discovery well. Summit Resources Limited, a Canadian corporation
has a 20 percent working interest, and Jordan Oil and Gas L.P., T.
Keith Marks, and the well operator, The Armstrong Corporation, hold
the remaining 30 percent.
The Columbia Gas System, Inc., is one of the nation's largest
natural gas systems. Subsidiary companies are engaged in the
exploration, production, purchase, storage, transmission and
distribution of natural gas and other energy operations such as
cogeneration. The Columbia Gas System, Inc., and its principal
pipeline subsidiary, Columbia Gas Transmission Corporation, have
been operating as debtors-in-possession under Chapter 11 of the
Federal Bankruptcy Code since July 31, 1991.
/CONTACT: H.W. Chaddock of Columbia Gas, 302-429-5261/
All For A Dollar announces Joint Plan of Reorganization is confirmed
SPRINGFIELD, Mass.--July 5, 1995--All
For A Dollar Inc. (NASDAQ: ADLRQ), announced that the Joint Plan of
Reorganization was confirmed June 30, 1995 by the U.S. Bankruptcy
Court in Worcester, Mass.
The effective date for the Chapter 11 Plan was July 3, 1995.
All For A Dollar Inc. (AFAD) has been operating under Chapter 11 of
the United States Bankruptcy Code since June 27, 1994.
The plan was deemed confirmed June 30, 1995 when AFAD deposited
approximately $3.6 million into a special account for the exclusive
purpose of making distributions pursuant to the plan.
The deposit was made possible by AFAD through cash on hand,
borrowings under it's existing line of credit, and by completing a
$1.5 million private placement of two-year notes with warrants. The
notes provide for varied principal payments through July 1, 1997.
The warrants entitled the holders to purchase up to 1,195,400 shares
of common stock at a price of $.50 per share excercisable over a two-
The plan provides for a 35 percent cash settlement of all
unsecured claims incurred by AFAD prior to its Chapter 11 case
filing. Administrative claims, priority claims and all tax claims
will be paid in full.
CONTACT: All For A Dollar, Springfield
Donald A. Molta, 413/733-1203