The Executive Life Insurance Co. financial debacle is about to claim another victim.

Temecula, Calif., Valley Unified School District last week revealed its $27.46 million 1989 borrowing is in imminent danger of default because the deal relies on Executive Life guaranteed investment contracts. The tax-exempt bond's next scheduled coupon payment is Sept. 1, 1991.

"Our belief is that we are not going to receive a release of money sufficient to make the interest payments," said John E. Brown, counsel for Temecula and an attorney with Best, Best & Krieger.

In April, the California Insurance Commission, conservator of the failed life insurance company, was granted a court order that allowed it to pay some policyholders in full, others 70% of their claims, and still others even less. GICs for municipalities are at the bottom of the heap, determined not to be "covered claims" by Commissioner John Garamendi.

Mr. Brown said the commissioner's stance on municipal GICs is increasing the chance of default. "The irony here is that the school district is a subdivision of the state. And here we have state agency [the commission] seizing another state agency's money," he said.

He added that three municipal entities, as a result, are denied access to their funds: the Rancho, Calif., Water District; Eastern Municipal Water District; and the city of Temecula.

Temecual used the state's Mello-Roos Community Facilities Act to create a special tax district and has recourse to levy new taxes on property designated in the bond indenture. The property in question, owned by San Diego-based Buie Corp., is the future site of senior citizen residential units. But Mr. Brown said that, dspite the special taxing ability, any levies would be too late to prevent default on the Sept. 1 payment.

"The cruz of it is there are no residences," he said. "The money necessary to build the roads and sewers is in the GICs."

Best, Best & Krief also is representing Buie Corp. in efforts to recoup the Executive Life funds.

Executive Life GIC-backed bonds have been attacked as arbitrage-producing deals since they showed up in 1986, and Temecula has all the characteristsics of such a deal. All of the parties in the transactions, from underwriter to issuer, made money on the sale, but the project was never built.

"These bonds were not sold in the interest of doing legitimate insurance business," said Jeffrey L. Eglow, president of Warren, N.J.-based JLE Asset Management. He said the chances Temecular or any issuer with Executive Life-backed GICs would get better treatment than other policyholders are slim.

"I can't imagine that a politician is going to have to go to constituents and tell them they didn't get full value because money went to bonds that are fraudulent," Mr. Eglow said.

Mr. Brown said Buie Corp. obtained a loan from Securities Pacific Corp. last month and planned to start construction this month, but the problems with the GICs and the prospect of a large special levy caused them to scrap the plans.

Temecula invested $25.44 million of the 1989 sale in Executive Life GICs, and $23.61 million remains locked into the contracts. Apart from the special tax revenues, only the GICs support the debt service.

Most of the municipalities holding Executive Life GICs are in the same sinking boat. The exception are those that included downgrade language in the investment contracts, which allows the purchaser to escape from the agreement if Executive Life were downgraded.

The Santa Ana Community Redevelopment Authority insisted on such a clause for the reinvestment of its $109 million bond in proceeds from a 1989 issue, and was able to get out of the GIC two months after Standard & Poor's Corp. -- recognizing Executive Life's colossal exposure to the corporate junk bond market -- dropped the insurer from its AAA position. Moody's Investors Service never rated Executive Life above A2.

It is unclear how many more municipal GICs written by Executive Life threaten bond issues and which have downgrade language. Repeated requests for a breakdown of GIC customers have been denied by both Executive Life management and the insurance commission.

In addition to Temecula, Whittier, Calif., has a $4.95 million deal tied up, and Simi Valley, Calif., is unable to get to almost $15 million of proceeds. State Sen. Marian Bergeson, R-Newport Beach, is spear-heading an effort to get the three municipalities' claims assigned a higher priority than currently proposed by Mr. Garamendi.

"We are looking at the possibility of resetting the priorities for those GICs within California," Sen. Bergeson said. "Much depends on how and when the company is sold.

"We need to get the federal government to understand that if Executive Life becomes solvent, it will be a revenue producer," she added.

Other GIC-backed issuers in 1989 include the St. Paul, Minn., Housing and Redevelopment Authority, which cannot get access to the proceeds of two sales totaling $11.28 million, and the Tucson Industrial Development Authority, which has $7.6 million tied up. All of these deals do not have downgrade clauses.

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