Jefferson County Wins Bond Payment Break From Banks (Update3)
By William Selway and Martin Z. Braun
April 15 (Bloomberg) -- Jefferson County, Alabama, officials approved an agreement with banks led by JPMorgan Chase & Co. to delay a $53 million bond payment that was due today as a state bid to keep it out of bankruptcy stalled.
County commissioners today voted unanimously in favor of the forbearance, said Leigh Butler, an aid to Commission President Bettye Fine Collins. The agreement extends by 30 days the deadline for paying off some sewer debt that banks were forced to acquire under agreements to act as buyers of last resort.
State and county officials are struggling to keep Jefferson County from becoming the largest U.S. municipal bankruptcy after downgrades of bond insurers sent interest costs soaring on its $3.2 billion sewer-system debt and prompted rating companies to lower the securities below investment grade. County officials say they can't cover the increased interest costs by raising sewer rates, which are already a burden to the poor.
``Nothing is off the table,'' said James White, president of Porter, White & Co., the county's Birmingham, Alabama-based financial adviser. ``We're looking at everything, but we don't see any appreciable rate increases on households to be sustainable.''
Two Alabama lawmakers have introduced bills to put under state control municipalities that default on their debt. Jefferson County Commissioner Jim Carns, a Republican who previously served in the Alabama House of Representatives, was critical of the bills, and so few senators showed up at a committee meeting this morning to consider them that no vote was taken.
No Quorum
Sue Spears, a clerk for the Industrial Development and Recruitment Committee, said there were only five senators present this morning, one short of what is needed for a quorum, and a new time to consider the bills has yet to be set.
``We couldn't vote on the bills or anything,'' she said.
The commissioners' vote also extends an agreement with banks to avert paying about $180 million in collateral on $5.4 billion of interest-rate swaps tied to the bonds. Commissioners approved similar extensions last month that were set to expire today.
Two of the companies that guarantee to make the payments on Jefferson County's sewer bonds in the event of default, FGIC Corp. and XL Capital Assurance Inc., both suffered credit rating cuts, causing investors to sell back the county's variable-rate bonds to banks in recent months and shun its auction debt.
Debt Costs
Without restructuring its bonds, interest costs on Jefferson County's sewer debt may reach $250 million, nearly twice the $138 million the system produces in revenue, Collins estimated last month.
The interest-rate swaps the county bought to hedge its risk on the variable-rate bonds backfired. Since the start of the year, the payments that Jefferson County receives under most of its swaps -- 67 percent of the one-month London interbank offered rate -- fell by some 41 percent to 1.82 percent, while its bond payments have climbed, according to Bloomberg data.
Jefferson County's sewer system became deeply in debt because of construction work required by an environmental consent decree with the federal government. Its latest financial problems stem from the debt crisis that has saddled banks worldwide with at least $245 billion in losses, triggered the near collapse of Bear Stearns Cos., and caused bond insurance companies to lose their AAA credit ratings after suffering losses on securities tied to home loans.
Legislation Introduced
Bills introduced last week by two Jefferson County lawmakers, Republican Senator Steve French and Democratic Representative Rod Scott, aimed to keep the county from going bankrupt. The bills would create an eight-member board, including representatives of the governor and legislative leaders, that could take over a county or utility that defaults on its debt.
The Senate last week also passed a resolution by French saying that state approval should be sought before bankruptcy, an effort to stall any such move. He said he is working to head off a bankruptcy that would have costly repercussions for any Alabama municipality that needs to raise money from Wall Street.
Last week, Carns, the county commissioner, said the county is best equipped to negotiate a solution on its own, though he said he wouldn't hesitate to listen to any proposals advanced by others.
Jefferson County has proposed using some of the sales tax it collects for its school bonds to make up for some of the sewer system's shortfall, though it has yet to reach an agreement with creditors.
``There are a lot of folks who are on the sidelines who think, `If the coach can send me in, I can score a three-pointer and win the game,''' Carns said after the bills were introduced last week. ``The problem is, you can't just bring somebody in that hasn't been in the game or who hasn't been practicing.''
To contact the reporters on this story: William Selway in San Francisco at wselway@bloomberg.net; Martin Z. Braun in New York at mbraun6@bloomberg.net.
Last Updated: April 15, 2008 17:34 EDT |
