Sending the plan to creditors for a vote is the final legal hurdle before U.S. Bankruptcy Judge Thomas Bennett in Birmingham, Alabama, decides whether to approve the proposal and allow the county to exit bankruptcy. The county still faces a threat from the bond market, where interest rates are higher than the county and its creditors expected.
Unless rates return to the lower levels seen in the past few years, the county may “have to go back to the bargaining table,” with creditors, Ken Klee, the attorney leading the restructuring, said in court yesterday in Birmingham.
Jefferson County’s reorganization plan is built on a settlement with creditors, including JPMorgan Chase & Co. (JPM) and a group of hedge funds. The bank and the funds hold the majority of the $3 billion in sewer warrants that the county proposes to cancel and replace with about $2 billion in new debt.
Creditors have until October to vote on the plan. That is about the time that the county will start a “road show” to sell the debt to investors, Klee said.
The interest rates that the county must pay on that new debt can’t be too high or the settlement will need to be renegotiated, Klee said.
The county may not be able to pay the current market rates, which were driven up earlier this year by comments made by Federal Reserve officials, a credit crunch in China and Detroit’s bankruptcy, Klee said.
“There are substantial risks that it will not be able to refinance come the fall unless the interest rates are within the rates that they have been historically,” he said.
Yields on benchmark 30-year munis have jumped 1.24 percentage points since June 4 to 4.57 percent, the highest in two years, according to data compiled by Bloomberg. Interest rates rose in June on speculation that the Federal Reserve would slow its bond buying, and then again following Detroit’s record bankruptcy filing on July 18.
The maximum rates the county can pay vary from 5 percent to 7 percent, depending on the type of debt being issued, according to the statement being sent to creditors. The county has proposed issuing three types of warrants with maturities stretching out to 2053: current interest bonds, capital appreciation bonds and convertible capital appreciation bonds. The rates would go up over time for each type.
The county’s lawyers appeared in court seeking approval of a disclosure statement that describes the settlement and the county’s plan to emerge from bankruptcy. The statement is designed to give creditors enough information so they can vote on the plan.
The county, backed by a group of sewer-warrant holders, will send creditors the statement describing how they will be affected by the debt-reduction plan. Bennett will take that vote into account when deciding whether to approve the plan in November and allow the county to exit bankruptcy by year’s end.
“It is obvious they have more than enough information to make a decision,” Bennett said in court as he overruled objections by local elected officials who claimed the county did not give creditors enough details about the plan.
Birmingham’s Water Works Board and the city of Bessemer, also located in Jefferson County, asked Bennett to force the county to add more financial information about its proposal to issue the $1.9 billion in new sewer debt.
County Tax Assessor Andrew Bennett and a group of local elected officials want the county to include more information about the ability of area residents to pay for the proposed rate increases. Households connected to the sewage system have a median income of about $30,000, the group said.
The case is In re Jefferson County, 11-bk-05736, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).
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