Orange County Bankruptcy

NAME & ROLL.NO:

Harshitha D
Abdus Salam D02
Mahesh Kumar D 24
Mayank Thakur D
Ravi Kumar Choubey D 37
What are Bonds?

- A bond, also known as a fixed-income security

- Debt instrument created for the purpose of raising capital.

- Essentially loan agreements between the bond issuer and an investor,

- The bond issuer is obligated to pay a specified amount of money at
specified future dates.
Types of Bonds

FIXED RATE BONDS FLOATING RATE BONDS ZERO INTEREST RATE BONDS

PERPETUAL BONDS BEARER BONDS GOVERNMENT BONDS

Convexity of Bonds
Convexity is a measure of the
curvature in the relationship
between bond prices and bond
yields.
Convexity demonstrates how the
duration of a bond changes as the
interest rate changes.
It is used as a risk management
tool
Types of Risk associated with Bonds
5 Major Risks Of Bond Investing

Inflation
Risk
Default
Risk
Interest
Rate

Risks

Rating
Liquidity Downgrades
Risk
 DEFAULTS BANKRUPTCY

A default is a situation when a debt

Bankruptcy is among the worst things that
obligation is not met, that is, the
principal or interest payments are not can appear in your credit report
paid when they are due.

In the event of a default, bondholders
seldom lose all of their principal value
of the bond. Often, a default could
result in the suspension of the coupon
payment.
When you file for bankruptcy, you are telling all
of your lenders that you will not be able to pay
them in full, or at all.
 Orange County Bankruptcy Case

• In December 1994, Orange County announced that its

investment pool had suffered a loss of $1.6 billion

• County Treasurer Robert Citron had Invested a $7.5 billion

in interest-linked securities

• This money belongs to county & 241 other associated local

government entities
Robert Citron

•Invested to generate funds as county had shortage of funds

for infrastructure expenses, because:
 In 1978 property taxes were slashed by 57%
 Fed & state funds reduced due to down 1990’s recession
 Investment by Citron

- Citron investment had delivered returns about 2% higher than the comparable
State pool

- The investment pool managed by him had become about $7.5 billion by the
90’s

- Citron’s strategy was dependent on the presumption that the Fed interest
rates would remain steady or may drop further, thus managed get high returns
with more risk

- County pool investment were made in number of US agency notes such as

fixed rate notes, agency floating rate notes, mortgage backed securities

- On December 1993, for instance, short-term yields were less than 3%, while 5-
year yields were around 5.2%

- In 1994, through reverse repurchase agreements Citron pledged this $7.5

billion securities as collateral to borrow $13 billion & reinvested this in new
securities mostly 5 years notes issued by Federal National Mortgage
 Interest Rate Risk
• When recession started subduing and US markets are getting stabilized then in Feb 1994
Fed began and kept on raising interest rates

• Citron kept buying securities in the desperate belief that what went up must come down.

• By Nov 1994 the investment pool was in crisis as the value of its interest rate-sensitive
medium-term investments sank by 20% to $1.6 billion
 After Impact

• December 6, 1994: Prompted by due date of certain repo transactions, Orange Country files for Chapter 9
protection.

• May 2, 1995: US Bankruptcy Court endorses settlement of what is left in the investment pool. Some 241 participants
get 77 cents in each dollar of their investment balance as a cash distribution.

• November 19, 1996: Citron is sentenced to a year in jail and $100,000 fine.

• December 17, 1997: Moody's Investors Service rewards the county's recovery and new investment policies with an
investment grade rating for key county borrowings.

• June 2, 1998: Orange County reaches a $400 million settlement of its lawsuit against Merrill Lynch.

• February 25, 2000: Some 200 municipal and governmental agencies finally made good in a disbursement of $864
million. But Orange County continues to pay off the recovery bonds it issued in 1995/6 to fund the bulk of the pools
losses.