Bankrupt Jefferson County Completes $1.8 Billion Sale of Bonds

Jefferson County, Alabama, raised yields on some junk-rated junior bonds to attract enough institutional investors to complete a sale of $1.8 billion of sewer debt as part of a plan to emerge from bankruptcy.

The county, which has 660,000 residents and is home to Birmingham, Alabama’s most populous city, increased yields on subordinated debt maturing in 2051 by about 0.2 percentage point to 6.7 percent, according to investors familiar with the offering who requested anonymity because pricing wasn’t final. Top-grade 30-year municipal debt yields about 4.06 percent, data compiled by Bloomberg show.

The borrowing yesterday marks the first time that a municipality offered long-term debt using its own credit while still in bankruptcy, according to Matt Fabian, managing director at research firm Municipal Market Advisors.

“Despite the challenges, all of the county’s new sewer warrants have been purchased by the underwriters,” county commission President David Carrington said by e-mail.

The county lowered yields on $600 million of senior bonds insured by Assured Guaranty Municipal Corp. by as much as 0.25 percentage point.

More than 200 investors placed orders, including some from Europe and Asia, Carrington said. The county will proceed to a hearing today to confirm its bankruptcy plan, he said in the statement.

This week’s sale comes two years after the locality of 660,000 residents said it couldn’t pay what it owed on more than $3 billion of bonds sold for sewer work. Until Detroit’s July filing, it was the nation’s largest municipal bankruptcy.

Pathfinder Deal

The financing may pave the way for other insolvent municipalities, said Fabian. Citigroup Inc., the lead underwriter, said it would market the debt to buyers such as hedge funds, which typically don’t invest in munis.

The senior bonds covered by Assured carried a AA- rating from Standard & Poor’s and an underlying BBB rating. Fitch Ratings graded the debt BB+.

The junior bonds aren’t insured and carry a junk BB rating from Fitch while S&P rates the debt investment grade, at BBB-.

Sewer rates will rise almost 7.9 percent each year from 2014 through 2017, and by almost 3.5 percent thereafter through 2053, according to bond documents.

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