Institutional investors are scrambling to scrutinize their portfolios to determine their exposure to Orange County, Calif., in the wake of the municipality's Chapter 9 federal bankruptcy protection filing.

Although virtually no Orange County securities are trading in the market, portfolio managers are marking down the value of bonds to compensate for the devaluation resulting from the bankruptcy petition.

And when they can, portfolio managers are selling Orange County securities or exercising put options, even if the securities are backed by an outside entity or credit provider and have no exposure to the county's financial woes.

According to CDA/Spectrum BondWatch, a firm that tracks mutual fund holdings, the five largest institutional investors in Orange County bonds hold more than $620 million of the securities.

The information compiled by BondWatch includes securities issued by Orange County or any of its agencies. It also includes issues for which the county may have acted as a conduit issuer. The data reflects information reported by the investors from February 1993 to SePtember 1994.

But the BondWatch data does not include investors' exposure to issuers with monies in the Orange County investment pool.

Franklin Advisors, whose $13.14 billion Franklin Califomia Tax-Free Income Fund is the nation's largest, has about $274.5 million of Orange County securities, according to BondWatch.

However, a Franklin spokeswoman said the firm only has about $27 million of Orange County securities. She declined to comment further until the firm completed an examination of its exposure to investment pool members.

Vincent R. Giordano, a senior vice president with Merrill Lynch Asset Management, said the firm's exposure to Orange County is "significantly below" the $128.6 million reported by BondWatch and is "basically minimal" in comparison to its total $30 billion of tax-exempt assets. He declined to give specifics.

"Any obligation is insured or backed by an irrevocable letter of credit," he said.

Within the last few weeks, Merrill portfolios have been restructured and some short-term Orange County securities with put features may have been sold, Giordano said.

John Nuveen & Co. declined to discuss its Orange County holdings, reported at about $44 million.

Fidelity Investments has about $40 million of uninsured bonds from members of Orange County's investment pool and $45 million of insured Orange County bonds in its portfolios, a spokeswoman said.

"We do have Orange County exposure. All of it is credit-enhanced," said Joe Piraro, a vice president and portfolio manager with Van Kampen Merritt.

Van Kampen's mutual funds hold approximately $23 million of Orange County securities, Piraro said. Most of the securities are sales tax revenue bonds or transportation authority revenue bonds, insured by AMBAC Indemnity Corp., Financial Guaranty insurance Co., and MBIA Corp. There is also one pre-refunded issue escrowed in Treasuries, he said.

Some portfolio managers are also concerned about the fallout for other Califomia issues.

"This is going to be on people's minds for a while and it's going to affect California," Piraro said.

Dealers are reluctant to qoute bids on Orange County bonds. But overall, California yields have risen by about 30 basis points, although there's been no actual trading activity, dealers said.

USAA Investment Management began avoiding issues from Orange County and its investment pool members during the first half of the year, after an analyst raised concerns about returns on the pool, said Ken Willmann, a vice president of mutual fund portfolios.

"We do not have anything that is exposed to the county proper," Willmann said Wednesday.

Willmann cautioned that simply looking for Orange County in the name of a security can be misleading, for example, in the case of a conduit issue.

However, USAA recently sold some securities on which Orange County served only as a conduit issuer. The bonds were secured by an outside entity and had no exposure to Orange County.

USAA has about $6.3 million of Orange County securities, down from about $16 million.

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