
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: THURSDAY, December 8, 1994                   TAG: 9412080044
SECTION: NATIONAL/INTERNATIONAL                    PAGE: A-10   EDITION: METRO 
SOURCE: Associated Press
DATELINE:                                 LENGTH: Medium

COUNTY BANKRUPTCY HAS BROAD IMPACT

The bankruptcy filing by Orange County, Calif., is like a stupefying slap for thousands of investors who bought what they thought were safe bonds from the affluent county and other government agencies enmeshed in its crisis.

What is the impact beyond Orange County's borders? Some basic questions and answers on the market in municipal bonds, the scale of the problem and why it matters.

Q: How could this happen in Orange County, one of the richest areas in the country?

A: The county runs a large investment fund, where it puts taxpayer money and its own borrowings to work in the financial markets. Many other counties, cities and states do the same. Last week, Orange County disclosed the fund suffered a $1.5 billion loss in value due to sharply rising interest rates.

Another 185 local agencies, such as school districts and water districts, also had invested millions in the fund. As a result, Wall Street investment banks declined to renew $1.2 billion in loans the fund had used in its investment strategies, forcing the county to seek Bankruptcy Court protection Tuesday.

Amid this financial crisis, investors who purchased municipal bonds from Orange County and the other agencies now are wondering if their investments are safe.

Q: What are municipal bonds? How does this crisis affect them?

A: The municipal bond market is one of the most basic parts of the American investment landscape and a critical way for local governments to raise money. More than 50,000 state and local government agencies have issued $1.3 trillion in municipal bonds to investors, with the proceeds used to build airports, schools and sewage systems. About 75 percent of all muni bonds are held by individual investors because they are tax-exempt.

``The main thing is, this is a very important market to our country, not just this one county,'' said James Spiotto, a municipal bond specialist with the Chicago law firm Chapman and Cutler.

The crisis could possibly lead to defaults in some of the bonds issued by Orange County or related agencies, which would make those bonds plunge in value and roil the municipal bond market., making it harder for issuers to sell bonds.But many experts don't believe there will be defaults. So far, the scale of the Orange County crisis has mildly depressed prices in the stock and bond markets as analysts wait to get more complete information.

Q: Is there a danger of default for bonds issued by agencies involved in the Orange County investment fund?

A: The situation is unclear, but defaults are unlikely based on past experience. Bond experts say individual investors should sit tight until better information surfaces.

Generally speaking, muni bonds with private insurance guaranteeing principal and interest payments will continue to make scheduled payments. AMBAC Indemnity Corp., a major bond issuer, said Wednesday it had sufficient resources to cover any defaults.

by CNB