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Jefferson County Bondholders Prepare for New Court Fight

Bondholders of Jefferson County, Alabama, in talks over ending the biggest U.S. municipal bankruptcy, are preparing for a fight over whether a court should force them to accept less than the $3.1 billion they’re owed.

The trustee for bondholders is seeking details about the value of the insolvent sewer system in order to prepare a defense against possible cuts. By October, the county may ask Judge Thomas B. Bennett in Birmingham, Alabama, to lower the amount it owes bondholders because the value of the system, which serves as collateral on the debt, has fallen.

Bondholders need to prepare for a court hearing while also arguing that the U.S. Bankruptcy Code bars a reduction in the sewer debt, the trustee, Bank of New York Mellon Corp., said yesterday in court papers.

“The trustee disputes that a valuation of the system or the net system revenues is appropriate or relevant in connection with the county’s obligations,” it said.

Jefferson County is deciding how much to raise sewer rates and whether the value of the system has fallen enough to justify forcing bondholders to take less than they are owed.

The county and bondholders started fresh negotiations last week. They will focus partly on the system’s value, Ken Klee, the county’s bankruptcy attorney, said today in an e-mail today.

Value of Assets

Should the county decide to push for a reduction of the sewer bond debt, the judge would consider the present value of the bondholders’ collateral, which is made up mostly of system assets.

The county contends that under Chapter 9 of the U.S. Bankruptcy Code, Bennett has the power to reduce the amount of the bond debt to be in line with the value of the bondholders’ collateral. Bondholders disagree.

“The county commission has not prejudged rates which will drive the value of the collateral,” Klee said. “The rates will determine the value of the collateral. Although preliminary testimony suggests the value of the system is less than the $3.1 billion remaining on the sewer debt, the commission has not formed a value judgment.”

The commission may decide whether to pursue a cut to the sewer debt in October, Klee said.

David Lemke and Larry Childs, attorneys for the trustee, didn’t immediately return calls for comment on the dispute.

Bennett ruled last month that Jefferson County can’t reduce payments to bondholders so it can spend more on its aging sewage system, or pay legal fees. The ruling was a victory for bondholders, shielding them from reduced payments while Jefferson County remains in bankruptcy. The county asked the judge to reconsider part of his ruling.

The case is In re Jefferson County, 11-05736-9, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).

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