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Alabama County Agrees to Extend Sewer System Cash Split

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May 31 (Bloomberg) -- Alabama’s bankrupt Jefferson County agreed to transfer $5.5 million to bondholders, extending a temporary deal to split cash from its insolvent sewer system with creditors while awaiting a ruling from a federal judge.

The agreement with Bank of New York Mellon Corp., trustee for bondholders owed more than $3 billion, allows the county to begin several sewer upgrades using cash it holds.

The agreement will last until June 29, or until U.S. Bankruptcy Judge Thomas B. Bennett makes a final decision on how to split sewer revenue between bondholders and construction projects the county says are needed to improve the system.

Bondholders, bond insurers and the trustee are battling the county over how to divide money left over after normal operating expenses for the sewer system are paid.

The bondholders say any leftover money is theirs. The county says it has the flexibility under the U.S. Bankruptcy Code to use the cash to fund system improvements, including changes required by federal clean-water laws.

In April, the two sides spent three days in U.S. Bankruptcy Court in Birmingham, Alabama, debating the definition of “necessary operating expenses.” The phrase is used in the bankruptcy code and governs how to split revenue between bondholders and public agencies that borrow money to build assets such as water-treatment plants.

Sewer Bonds

Jefferson County entered the largest U.S. municipal bankruptcy in November after local and state officials and creditors failed to implement an agreement to cut the county’s sewer debt by about $1 billion. The county owes creditors about $4.2 billion, including more than $3 billion in bonds related to the sewer system, according to court records.

Bennett said he will sign a written order later today after other sewer creditors have a chance to join the temporary deal. The judge hasn’t said when he will rule on a permanent split of the sewer revenue.

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

-- Editors: Stephen Farr, Mary Romano

To contact the reporter on this story: Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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