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Jefferson County Details $1.74 Billion Sale to Exit Court

Alabama’s Jefferson County is set to sell about $1.74 billion of sewer-refinancing debt this month as part of a plan to exit court protection almost two years after what began as the largest U.S. municipal bankruptcy.

Citigroup Inc. (C), as lead underwriter, will price the warrants as soon as Nov. 19, according to a person with direct knowledge of the transaction who asked not to be identified yesterday in discussing it before sale results are final. A period for individuals to place orders for the securities will begin the day before pricing is set, the person said.

In July, Citigroup said it would market the Jefferson County debt to short-term investors and present potential buyers with a picture of securities that are poised to gain over the next five years as the sewer system’s finances improve, the bank’s underwriting proposal shows. The county of 660,000 residents is home to Birmingham, Alabama’s most-populous city.

“Our targeted buyers for the warrants will not be long-term holders as is often the case with high-grade municipal bonds, but rather savvy short-term buyers who recognize the significant potential for improvement in the county and its warrants over time,” according to Citigroup’s proposal. The New York-based bank holds some Jefferson County sewer debt, which will be purchased with proceeds from the refinancing, according to a preliminary sale document released late yesterday.

Revised Agreement

The offering is a result of a deal reached Oct. 30 between the county and its creditors to reduce the amount of money the county must pay on its obligations. The accord replaced a proposed settlement reached in June, which became unworkable as interest rates rose over the past several months.

The warrants mature from October 2015 to 2053, according to the sale document. Paying off the debt will cost the county an estimated $6.67 billion, based on an interest cost of about 6.9 percent, the document shows. By comparison, 30-year U.S. Treasury bonds carried a yield of almost 3.7 percent yesterday.

Sewer rates will rise almost 7.9 percent each year from 2014 through 2017, and by almost 3.5 percent thereafter through 2053, according to the document. The system’s operating revenue over expenses fell about 1 percent to $101.5 million in 2012 from the previous year and down 8.5 percent from 2008.

Under covenants spelled out in the sale document, the county will adjust sewer-system fees and charges if the operation fails to meet required debt-coverage ratios during a fiscal year. The changes must be made during or before the following fiscal year.

Rate Tie-In

If the system doesn’t meet the required coverage ratios for two consecutive years, it must hire an independent consultant to recommend revised rates and charges to improve its results. The ratio of available revenue to projected debt service for fiscal 2014 is about 1.8

The issue is divided between $500 million of senior debt and about $1.24 billion of subordinate debt. For the senior warrants, net income available to cover payments must be at least 125 percent of debt-service requirements, while that ratio is 110 percent for subordinate debt, the document shows.

About $1.13 billion of the debt will carry fixed interest rates, the sale document shows, while $485.6 million will be in the form of zero coupon warrants that may be converted to fixed rates. The remaining $127.6 million will be zero-coupon securities.

Debt Ratings

About a third of the debt to be sold, or $500 million, will be insured by Assured Guaranty Municipal and will carry an AA-grade from Standard & Poor’s, the document shows. Ratings on the rest of the securities may be set as soon as today.

Jefferson County sought bankruptcy protection on Nov. 9, 2011, listing more than $3 billion in obligations. It was the biggest municipal bankruptcy in U.S. history until this year, when Detroit, laden with more than $18 billion in debt and other commitments, sought court protection in July.

Yields on BBB rated revenue bonds maturing in 30 years averaged about 5.5 percent yesterday, up from 5.4 percent Nov. 1 and down from almost 6 percent on Sept. 3, the most since at least March, data compiled by Bloomberg show.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net; Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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