Citigroup Chosen to Manage Jefferson County Debt Refinancing

Citigroup Inc. will manage a $2 billion refinancing of Jefferson County, Alabama, sewer bonds, part of the locality’s plan to end the biggest U.S. municipal bankruptcy.

Jefferson County commissioners voted today to select Citigroup, the third-biggest underwriter of U.S. municipal bonds last year. Citigroup was the lowest bidder, offering to underwrite the debt for $7 per $1,000 of bonds, according to county officials. The county has budgeted $19 million for banking fees related to the deal.

“If anyone can bring that loan, it’s Citi,” said Matt Fabian, a managing director at Concord, Massachusetts-based Municipal Market Advisors. “Citi is a large and dedicated market maker in the high-yield space.”

Jefferson County, which encompasses Birmingham, filed a plan on June 30 to exit bankruptcy by cutting $1.2 billion in principal payments to investors holding about $3 billion in defaulted sewer bonds. The debt was issued mostly in 2002 and 2003 to refinance older bonds sold to raise money for a court-ordered overhaul of the county sewer system, which was riddled with corruption.

The county’s plan is based on a settlement announced last month that included JPMorgan Chase & Co., seven hedge funds and a group of bond insurers, which together hold about $2.4 billion of the debt. JPMorgan, which led the derivative-laden refinancings that helped push the county into bankruptcy, agreed to forgive $842 million of the $1.22 billion it is owed.

Secret Payments

JPMorgan also agreed to a $722 million settlement in 2009 with the U.S. Securities and Exchange Commission to end a case over secret payments to friends of Jefferson County commissioners in the sale of floating-rate sewer bonds and interest-rate swaps.

“Not only did Citigroup offer the county the lowest price and a guaranteed sale, they were not involved in any of the previous questionable transactions,” said Jefferson County Commission President David Carrington in an interview.

Hedge funds owed about $872 million will collect more than 80 cents on the dollar, and will help backstop the refinancing to ensure the county can raise all of the money it needs, according to the agreements. The insurers will get $165 million out of their $315 million in claims.

Refinance Rush

Jefferson County is set to refinance before interest-rates climb higher. Yields on bonds rated below investment grade, or not rated, rose to 6.55 percent on June 24, their highest in more than 11 months, according Standard & Poor’s Municipal Bond High Yield Index.

Yields rose and prices fell as investors pulled about $1.2 billion from high-yield muni funds in the week through June 26, as municipal bonds joined a fixed-income selloff fueled by bets that the Federal Reserve will slow its bond buying.

The index has since declined to 6.46 percent as of July 12.

Under the terms of the plan approved by the commission last month, the county plans to issue $1.84 billion of debt in a mix of three different securities.

The county projects issuing about $1.4 billion of new debt, paying interest on a periodic basis with coupons ranging from 5 percent to 6.451 percent, according to documents filed with the bankruptcy court.

Citigroup Commitment

Another $300 million of zero-coupon bonds will be issued, along with $175 million of zero-coupon bonds that that convert to a security that pays interest on a periodic basis, according to documents filed with the court. Citigroup committed to purchase bonds that it can’t sell, said county Commissioner Jimmie Stephens. The bankruptcy judge doesn’t need to approve the selection of Citigroup, he said. Morgan Stanley, Wells Fargo & Co., Bank of America Corp., Piper Jaffray Cos. and the Royal Bank of Canada also bid.

“This commission has removed all the fraud,” Stephens said in an interview. “We’ve changed a complex variable debt into a simple fixed-rate instrument.”

The financing plan depends on the county raising sewer rates 7.41 percent annually for four years and 3.49 percent annually after that. The county can cancel the refinancing if projected borrowing costs rise by more than 0.5 percentage point because of higher interest rates or if consumption by water and sewer customers declines.

After the deduction of annual operating expenses for the sewer system, the remaining sewer revenue will be equal to the amount needed to pay debt service and annual capital expenses, according to documents filed with the court.

Scott Helfman, spokesman for New York-based Citigroup, declined to comment.

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

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