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Jefferson County JPMorgan Deal Called Safer Than Suing

Jefferson County, Alabama’s, bankruptcy deal with JPMorgan Chase & Co. and other creditors would lock in more than $1.4 billion in concessions without the risk of suing the bank, a consultant said in court.

Eric Rothstein, a county utility rate consultant, said yesterday that those savings are a safer proposition than the $1.6 billion that could be won in a lawsuit that opponents of the county’s bankruptcy exit plan want to pursue.

“That $1.4 billion writedown is a certainty,” Rothstein said in U.S. Bankruptcy Court in Birmingham, the county seat. “The $1.6 billion number is speculative, and I believe must be discounted.”

Rothstein was testifying at the start of a hearing on whether to approve Jefferson County’s bankruptcy-exit plan, which is built on concessions from JPMorgan and other creditors.

The proceeding is set to continue today before U.S. Bankruptcy Judge Thomas Bennett, who will decide whether to approve the plan or side with two groups of lawyers who want to sue the bank and others for their role in issuing more than $3 billion in debt that was tainted by a bribery scandal. His decision could come as soon as today.

After battling in court for about 20 months, creditors owed $2.7 billion, including New York-based JPMorgan (JPM), settled with the county in June by agreeing to accept less. A rise in interest rates forced more concessions, which were announced last month. The plan also imposes several years’ worth of rate increases on sewer users.

New Financing

County officials want Bennett to approve their plan by tomorrow so they can close on $1.84 billion in new financing on Dec. 3.

“Let’s put the last nail in the coffin and bury it,” County Commissioner Jimmie Stephens said yesterday at a county commission meeting. “Let’s restore accountability.”

The $4.2 billion bankruptcy, filed Nov. 11, 2011, was the largest by a U.S. city or county until it was overtaken in July by Detroit’s $18 billion case.

This week’s hearing is a chance for the last plan opponents to persuade Bennett to reject it.

The final major opposition comes from two sets of lawyers fighting to save the suits they filed on behalf of plaintiffs including sewer ratepayers. They asked Bennett to reject the plan because the rate increases are too high for residents to afford. Should Bennett reject the plan, the lawsuits, which are now on hold, could resume.

Rejecting the plan would blow up the settlement because the county agreed to halt the lawsuits in return for a reduction in principal on the $3 billion in sewer debt. Under the settlement, the sewer debt will drop to $1.98 billion with plan approval.

Can’t Afford

Attorney Calvin B. Grigsby said the plan imposes the burden on Jefferson County’s poorest residents, who may not be able to meet the higher rates needed to pay off the debt. The economic information the county used to justify the plan of adjustment is flawed because it ignores fact that the “predominant users are poor and black,” Grigsby told Bennett today.

Bennett allowed five members of the public to speak at the hearing. Four, including two elected officials, opposed the plan, saying the rate increases would harm the area’s poorest residents.

Bennett said he planned to give an oral ruling about the bankruptcy-exit plan from the bench followed by a written order.

The county sold all of the new warrants needed to raise $1.84 billion to refinance about $3 billion in sewer debt, the county’s lead bankruptcy lawyer, Kenneth Klee of Klee Tuchin Bogdanoff & Stern LLP in Los Angeles, said in court today. The plan calls for selling $500 million in senior bonds and $1.2 billion in subordinated debt.

‘Lower Rate’

“When the credit rating of Jefferson County improves, the county will be able to go back into the market and refinance and get a lower rate,” he said.

The case can be traced to an aging sewage system that federal regulators ordered fixed in the 1990s. To pay for the repairs, Jefferson County began borrowing money and refinancing old debt, issuing more than $3 billion in warrants and interest-rate swaps by 2003.

Local elected officials accepted bribes from construction contractors and financial advisers seeking business with the county. By 2010, 21 people, including four county commissioners, had been convicted or pleaded guilty to corruption-related charges, according to Peggy Sanford, a spokeswoman for the U.S. Attorney’s Office in Birmingham.

JPMorgan Settlement

In 2009, JPMorgan signed a $722 million settlement with the U.S. Securities and Exchange Commission for its role in helping arrange the sewer debt.

As part of the June deal, JPMorgan agreed to forgive about $842 million of the $1.22 billion the county owes it. After interest rates rose, JPMorgan agreed to forgive about $100 million more in debt and to provide the county with a letter of credit for about $180 million.

The 40-year letter of credit is “unprecedented in the history of finance as I know it,” Klee said today. It will set up a debt-service reserve required for the new sewer warrants and save the county money, he said.

Other creditors, including bond insurers and a group of hedge funds, also agreed to take less than they were owed.

The plan calls for the bankruptcy court to retain jurisdiction for the life of the new sewer bonds the county will issue to fund the end of the case. This would allow the bond trustee to seek court approval to force the county to go forward with rate increases that were agreed to as part of the settlement with JPMorgan and other creditors.

The bond trustee could also seek court authority to require the county to impose future increases should rates not be high enough to cover the debt.

The case is In re Jefferson County, 11-bk-05736, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).

To contact the reporter on this story: Steven Church in bankruptcy court in Birmingham, Alabama, at schurch3@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

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