Jefferson County, Alabama, is meeting with JPMorgan Chase & Co. (JPM) and bond insurers in New York today and tomorrow to try to renegotiate a $1.84 billion debt-reduction settlement tied to the county’s bankruptcy-exit plan, a person familiar with the discussions said.
The county said in August that the deal was in jeopardy because interest rates had risen more than anticipated, making a bond refinancing to fund the bankruptcy exit too expensive. A group of hedge funds that took part in the original deal won’t attend the talks, said the person, who asked not to be identified by name because the discussions aren’t public.
The county’s lead bankruptcy attorney, Ken Klee, declined in an interview to say whether his client was meeting with creditors today. He said any talks would be confidential and face the same hurdle that made past negotiations difficult.
“The creditors squabbling among themselves has always been the most difficult problem to resolve in this case,” said Klee, of Los Angeles-based Klee, Tuchin, Bogdanoff & Stern LLP.
Thomas Moers Mayer at Kramer Levin Naftalis & Frankel LLP, lead attorney for the hedge funds, couldn’t be immediately reached for comment. He is on vacation this week, according to a voice-mail recording at his office.
To end its almost two-year stint in bankruptcy, the county reached a deal in June with creditors that hold the majority of about $3 billion in outstanding sewer-system debt. Under that proposal, creditors would split about $1.84 billion in cash instead of pressing for full repayment.
Creditors voted overwhelmingly in favor of the exit plan based on that settlement, Klee said. Unless New York-based JPMorgan, the hedge funds and the bond insurers that signed the deal now agree to revise the settlement and accept deeper cuts, the county will have to withdraw the plan, Klee said.
The creditor vote would still count if the county negotiates a new settlement. Under the U.S. Bankruptcy Code, such plans can be modified as long as the creditors who voted won’t be affected by the changes or have agreed to them as part of a settlement.
U.S. Bankruptcy Judge Thomas Bennett is scheduled to consider approving the bankruptcy-exit plan next month at a hearing in Birmingham, Alabama.
The maximum rates the county can pay vary from 5 percent to 7 percent, depending on the type of debt being issued, according to a description of the plan sent to creditors before they voted. 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 for each type would rise over time.
The yield on a generic 30-year, tax-exempt revenue bond rated BBB is 7.2 percent, according to data compiled by Bloomberg. The interest rate is higher than the maximum the county says it can pay.
Since the plan was negotiated, rates have been driven up by comments from Federal Reserve officials, a credit crunch in China and Detroit’s bankruptcy. The partial shutdown of the federal government and the potential for a default on U.S. Treasury bonds has made the interest rate outlook worse for the county.
“The government shutdown has not been helpful,” Klee said.
The case is In re Jefferson County, 11-bk-05736, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).
-- With assistance from Martin Z. Braun in New York. Editors: Andrew Dunn, Michael Hytha
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