The bankruptcy of Jefferson County, Alabama, imposes limits on the power of the receiver who runs the county’s insolvent sewer system on behalf of bondholders owed more than $3 billion, a judge ruled.
U.S. Bankruptcy Judge Thomas B. Bennett in Birmingham ruled yesterday that when the county filed its Chapter 9 case, the state court that appointed the receiver lost its authority over the sewer system. Bondholders, the bonds’ insurers and the receiver, John S. Young Jr., wanted the same judge who stripped the county of the sewer system in 2010 to have final approval over rate increases.
Bennett said Young may continue to receive and distribute revenue from the system to bondholders as long as operating expenses are paid first.
The ruling may make it harder for Young to negotiate with the county on behalf of bondholders because it “ties one hand behind his back,” Alan M. Schankel, director of fixed income at Janney Capital Markets in Philadelphia.
“I am not sure the receiver’s role is important if this stands,” Schankel said in an interview. Allowing Young to continue to collect and distribute revenues to bondholders means the ruling wasn’t a total defeat for bondholders, Schankel said.
Young didn’t return calls for comment.
Lawyers for the receiver and the bondholders cited the county’s past mismanagement in arguing that the system should remain under state court authority and Young’s management. In his ruling, Bennett said a new group of elected officials should be given a chance to operate the system.
“The current commissioners are not of the same ilk as the former ones,” Bennett wrote.
“It looks like this is good news for the county,” Commissioner Jimmie Stephens, head of the commission’s finance committee, said in an interview.
The ruling that limits Young’s powers means receivership isn’t as good a remedy as the municipal bond market had believed, Matt Fabian, a managing director at Municipal Market Advisors in Concord, Massachusetts, said in an interview yesterday.
“Every investor needs to judge revenue bonds as a bit riskier than before,” he said.
Bondholders avoided the “catastrophe” of having their lien on the sewer revenue interrupted. Disrupting that payment stream would have redefined how the municipal bond market thinks about revenue bonds, Fabian said.
Largest Municipal Bankruptcy
Allowing the state court to retain jurisdiction over the sewer system would make it more difficult for the county to resolve the largest municipal bankruptcy in the U.S., Bennett said.
Jefferson County filed bankruptcy in November, more than a year after a state court gave Young control of the sewer system.
The county, state officials, the receiver and bondholders failed to implement a tentative agreement that would have required the sewer debt to be cut by about $1 billion, rates to increase and the Alabama Legislature to enact new laws to benefit the county’s finances.
The bankruptcy is tied to a sewer refinancing tainted by political corruption. In 2009, JPMorgan Chase & Co. agreed to a $722 million settlement with the Securities and Exchange Commission over payments its bankers allegedly made to people tied to county politicians to win business.
Former Commissioner Larry Langford was convicted on charges of accepting bribes. In 2008, a derivative-laden refinancing set up by JPMorgan unraveled as fallout from the subprime-mortgage market collapse rippled through Wall Street, sending debt costs soaring.
Justin Perras, a spokesman for JPMorgan, declined to comment on the ruling.
Jefferson County was the 13th Chapter 9 bankruptcy filing last year. Three other municipalities filed: Boise County, Idaho; Central Falls, Rhode Island; and Harrisburg, Pennsylvania.
The rest were special-purpose districts and public-benefit corporations eligible to use Chapter 9.
A bankruptcy judge dismissed Harrisburg’s case last month, saying it wasn’t properly authorized.
The average price on a Jefferson County sewer bond maturing in 2027 declined to 51.8 cents on the dollar yesterday from 55 cents on Dec. 30, according to data compiled by Bloomberg. The trades were for small blocks of $5,000 or $10,000 of debt.
The case is In re Jefferson County, 11-05736-9, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).