Jefferson County’s Major Creditors Agree on Debt Reorganization
Jefferson County’s major creditors signed agreements in principle to reorganize $3.14 billion of sewer debt that has driven the Alabama county to consider what would be the biggest U.S. municipal bankruptcy
The signed letters include one from JPMorgan Chase & Co. (JPM), which arranged most of the debt, said John Young, a court- appointed receiver running negotiations.
JPMorgan would provide $750 million of about $1.1 billion in concessions under a proposal the county’s five commissioners plan to vote on at 11 a.m. New York time today, Commissioner Joe Knight said in an interview yesterday. If the settlement is rejected, the county may declare bankruptcy.
If the plan is approved, the county and its banks would take another month to turn the terms into a binding agreement, with a deadline of Oct. 15, Young said.
Any deal also hinges on the state Legislature taking action on the county’s projected deficit. Jefferson County is facing a $40 million gap in its operating budget that begins Oct. 1 after the Legislature failed to help replace a source of tax revenue that was thrown out by a court.
The size of JPMorgan’s offer was confirmed by a second person familiar with the negotiations, who requested anonymity because the talks are continuing. The remaining amount of about $350 million will be split among banks that provided credit lines for the debt, bond insurers and investment funds.
Major Holder
JPMorgan, which managed the county’s sewer-bond refinancings in 2002 and 2003, holds about $1.2 billion of the county’s $3.1 billion sewer debt, the person said.
Justin Perras, a spokesman for New York-based JPMorgan, declined to comment on the settlement proposal in an e-mail.
Some commissioners say they aren’t satisfied with terms of the settlement, including the size of sewer-rate increases customers would pay over the next three years.
“The numbers are not quite there yet,” commission Finance Chairman Jimmie Stephens said today. He said he wouldn’t vote for a settlement if that doesn’t change.
“I’m going to listen to what the bankruptcy attorneys say to understand the pros and cons of a settlement and bankruptcy,” Stephens said. “At that time, we will come back, and I will make up my mind.”
Rate Increases
Under the proposed deal, the county would refinance $2.05 billion to repay old debt, contingent on an additional $30 million in concessions from creditors. Sewer customers would face three yearly sewer-rate increases of 8.2 percent starting as soon as Nov. 1, followed by projected annual growth of no more than 3.25 percent, according to a term sheet obtained by Bloomberg News.
The rate increases may be reduced if the county chooses to purchase as much as $1 billion in bond insurance from Assured Guaranty Ltd. (AGO), said the person familiar with the negotiations.
Commissioner Sandra Little Brown said in an interview today she wanted to see sewer rates closer to 7.8 percent annually. Knight and Brown said those disagreements can be worked out over the next month, before the final deal is signed in October, assuming the commission approves it today.
Jefferson’s step toward bankruptcy was brought on by adjustable-rate bond deals arranged by banks led by JPMorgan in 2002 and 2003 that were coupled with interest-rate swaps. The strategy mirrored similar deals engineered for borrowers around the country -- ostensibly to save money -- that wound up costing local governments billions of dollars when the financial crisis rattled Wall Street.
Political Corruption
The bond deals were also rife with political corruption, which caused the cost of the sewer project to soar as it was built during the 1990s. Former commission president and Birmingham Mayor Larry Langford, a Democrat, was convicted of accepting bribes in connection with the financing.
The proposed settlement will mean the Jefferson County debacle will have cost JPMorgan $1.47 billion because it previously agreed to a $722 million settlement with the Securities and Exchange Commission over politically oriented kickbacks paid to land the financings.
Two former JPMorgan bankers are fighting SEC charges that they made $8 million in undisclosed payments to friends of commissioners to secure the bank’s role in the deals.
The financings arranged by JPMorgan left the county exposed to market turmoil in 2008, when the credit crisis pushed up municipal lending rates. After some bond insurers incurred losses on subprime-related securities and lost their top credit ratings, investors dumped Jefferson debt, forcing the county to pay penalty rates as high as 10 percent.
To contact the reporters on this story: Margaret Newkirk in Birmingham, Alabama, at mnewkirk@bloomberg.net Martin Z. Braun in New York at mbraun6@bloomberg.net Kathleen Edwards in Birmingham, Alabama, at .
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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