Jefferson County Investors Seek Plan Vote as Exit Nears

Jefferson County, Alabama’s, sewer-debt holders may win the right to vote on the county’s debt-reduction plan following a hearing on the matter today, the final legal hurdle before a judge decides whether to end the county’s $4 billion bankruptcy.

U.S. Bankruptcy Judge Thomas Bennett in Birmingham, Alabama, is scheduled to consider a timeline that would wind down the second-biggest U.S. municipal bankruptcy just as the biggest, filed last month by Detroit, gets under way.

The county and a group of sewer-warrant holders seek to send creditors a disclosure statement describing how they will be affected by the debt-reduction plan and giving them an Oct. 7 deadline to vote. Bennett would take that vote into account when deciding whether to approve the plan in November and allow the county to exit bankruptcy by year’s end.

“The plan is the product of more than 18 months of effort, to restore the county’s general fund to operational balance, to address and resolve years of litigation involving the sewer system and its indebtedness,” the county said in the disclosure statement.

The plan is based on a settlement between the county and creditors, including JPMorgan Chase & Co. and a group of hedge funds. The bank and the hedge funds hold the majority of the $3 billion in sewer warrants that Jefferson County proposes to cancel and replace with about $2 billion in new debt.

Principal Reduction

Those creditors agreed to support that plan, which would be the first time since the 1930s that a U.S. municipality has used a bankruptcy case to impose cuts in principal on bond investors.

Detroit’s judge has scheduled a trial on Oct. 23 to decide whether that city’s $18 billion bankruptcy should go forward or be dismissed, as unions and pension officials say they will request. If Detroit clears that hurdle, the city said, it intends to file a plan by the end of the year to reduce its debt, setting up another series of court battles for 2014.

Under Jefferson County’s plan, JPMorgan would collect about 31 percent of what it’s owed, or $375 million of $1.22 billion, while seven hedge funds will recover more than 80 percent of the $872 million they are owed.

Citigroup Inc. was picked by county commissioners to manage the $2 billion refinancing.

The county will raise sewer rates 7.4 percent annually for four years. Those rates may go higher if interest rates rise before the refinancing is completed.

Local public officials have objected to the disclosure statement, saying it doesn’t contain enough information for creditors to vote.

New Debt

Birmingham’s Water Works Board and the city of Bessemer, also located in Jefferson County, asked Bennett to force the county to add more financial information about its proposal to issue the $1.9 billion in new sewer debt.

County Tax Assessor Andrew Bennett and a group of local elected officials want the county to include more information about the ability of area residents to pay for the proposed rate increases. Households connected to the sewer system have a median income of about $30,000, the group said.

JPMorgan, the hedge funds and the bond insurers have all pledged to vote in favor of the plan as part of the settlement.

Warrant holders who are owed more than $500 million aren’t part of the deal and can vote however they like. They will have a choice of collecting 65 cents of every dollar they are owed, or 80 cents on the dollar if they give up their right to collect money from the insurers.

Tainted Refinancing

The bankruptcy is tied to a sewer refinancing tainted by political corruption. In 2009, JPMorgan agreed to a settlement with the U.S. Securities and Exchange Commission over payments its bankers were accused of making to people tied to county politicians to win business.

JPMorgan, based in New York, paid the county $75 million in that settlement and has given up more than $657 million in swaps claims it held.

Jefferson County supplanted Orange County, California, as the largest municipal bankruptcy in the U.S. Orange County entered court protection in 1994 after losing $1.7 billion on interest-rate bets.

While its petition initially listed more debt than Jefferson County, much of that liability was reduced in the early weeks of the case. Partly through lawsuits against the financial firms, Orange County creditors were paid in full.

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

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