Jefferson County, Alabama, reached an agreement to pay its largest creditors $1.84 billion, or 60 percent of what they’re owed, as part of a plan to end the biggest U.S. municipal bankruptcy by the end of the year.
JPMorgan Chase & Co., seven hedge funds and a group of bond insurers, which together hold about $2.4 billion, or about 78 percent, of the county’s sewer debt, agreed to the deal. JPMorgan, which holds $1.22 billion of debt, will forgive $842 million. Adding in a previous settlement, the bank will have either paid the county, or given up the right to collect, $1.57 billion.
The settlement ends more than 18 months of bankruptcy court battles between the county and its biggest creditors over how much the jurisdiction can afford to pay on more than $3 billion it borrowed to expand and improve the county’s sewage system.
“This provides a template for providing peace in Jefferson County,” Kenneth Klee, an attorney for county, said at a meeting of the county commission in Birmingham.
The agreements require approval by November of a bankruptcy-exit plan that would adjust the county’s debts, Klee told U.S. Bankruptcy Judge Thomas Bennett today in a hearing. Bennett must approve the plan before the county can refinance the sewer debt and end its Chapter 9 case.
The county’s attorneys, led by Klee’s Los Angeles law firm, Klee, Tuchin, Bogdanoff & Stern LLP, have won bankruptcy court rulings that allowed the county to maintain control of the sewer system and its revenue stream, which is pledged as collateral for its warrants.
Under the terms of the agreement, Jefferson County will pay sewer-warrant holders a total of $1.84 billion of the $3 billion owed, according to a one-page summary distributed yesterday at the commission meeting.
The county sold the warrants, which are almost identical to bonds, to investors, promising that the debt would be repaid using the monthly service fees collected from homes and businesses connected to the sewage system.
Hedge funds owed about $872 million will collect more than 80 cents on the dollar, according to the agreements, which were made public yesterday. The hedge funds will also help backstop the refinancing to ensure that the county can raise all of the money it needs.
The funds include Brigade Capital Management LLC, Claren Road Asset Management LLC, Fundamental Advisors LP and Monarch Capital Master Partners LP, according to court records.
Carney Hawks, a partner at Brigade Capital, led negotiations for the hedge funds and agreed to restrict his trading activities during the talks so he could receive confidential financial information, Klee said today in court.
The insurers, including Assured Guaranty Municipal Corp., Syncora Guarantee Inc. and Financial Guaranty Insurance Co., will get $165 million. They claimed to be owed $315 million.
The county will also pay as much as $25 million in any claims filed against the insurers by creditors seeking to recover losses, according to the agreements.
Assured Guaranty faces $464 million in direct and assumed exposure to the sewer warrants, the company said in an e-mailed statement. If the deal wins final approval, the company’s losses should fall within established reserves, Assured said.
The county will pay creditors about $200 million less than what was proposed in a tentative agreement that failed just before 2011 bankruptcy filing.
Elizabeth C. Seymour, a spokeswoman for JPMorgan, declined to comment on the accord.
The deal is made up of three agreements that require the creditors to support Jefferson County’s reorganization proposal. That proposal, called a plan of adjustment, needs approval by Bennett, the bankruptcy judge.
The deal will “form the backbone of our plan” to adjust the county’s debt, Jimmie Stephens, chairman of the county commission’s finance committee, said. “I look forward to restoring Jefferson County to its former position of leadership.”
Under the settlement, the county will raise sewer rates 7.4 percent annually for four years. Those rates may go slightly higher if interest rates rise before the refinancing closes.
Warrant holders who are owed more than $500 million aren’t part of the deal. They will have a choice of collecting 65 cents on every dollar they are owed, or 80 cents on the dollar if they give up their right to collect money from the insurers.
Those warrant holders and other creditors have the right to vote on the plan of adjustment. Bennett will take that vote into consideration when deciding whether to approve the plan.
The bankruptcy is tied to a sewer refinancing tainted by political corruption. In 2009, JPMorgan agreed to a settlement with the U.S. Securities and Exchange Commission over payments its bankers allegedly made to people tied to county politicians to win business.
JPMorgan paid the county $75 million in that settlement and has given up more than $657 million in swaps claims it held.
Jefferson County supplanted Orange County, California, as the largest municipal bankruptcy. Orange County entered court protection in 1994 after losing $1.7 billion on interest-rate bets.
While its petition initially listed more debt than Jefferson County, much of that liability was reduced in the early weeks of the case. Thanks partly to lawsuits against the financial firms, Orange County creditors were paid in full.
The case is In re Jefferson County, 11-bk-05736, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).
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