BRADENTON, Fla. - Jefferson County Commissioners on Friday unanimously approved another 60-day forbearance agreement negotiated with insurers, swap counterparties, and banks as they continue to seek to restructure the $3.2 billion of sewer debt owed by Alabama's largest county.
Most of that debt is in troubled auction- and variable-rate debt on which interest rates skyrocketed because of the subprime meltdown. Failed debt remarketings forced banks to hold $850 million of variable-rate warrants. The county also had failed auctions on some of its $2.2 billion of auction-rate securities resulting in higher interest rates.
Because of the market disruption, swap payments went out of synch and underlying rating downgrades on the sewer debt, now well below investment grade, invoked requirements that the county post collateral or insurance to cover those payments. The county said it would not post either.
Under terms of liquidity facilities accelerating repayment of the variable-rate debt, the county is required to make 16 quarterly payments of $53 million each on the first business day of each quarter.
On Friday, commissioners agreed in the latest forbearance agreements to pay $11 million on the $53 million payment due April 1, which was delayed by previous forbearance agreements.
Friday's action delays until Aug. 1 the remaining $42 million payment due on April 1 and another $53 million payment due in July as part of the quarterly repayment schedule.
Meanwhile, cash-strapped Jefferson County continues negotiating with banks, bond insurers, and swap counterparties on ways to repay its sewer debt and avert bankruptcy. The county wants to apply excess sales tax revenues to help repay its sewer debt. Those revenues are now pledged to repayment of $1 billion of school warrants and an act of the Legislature would be required to divert the excess funds.
The county has also rejected proposals made by creditors to raise sewer rates and other fees.
Last Thursday, all five county commissioners signed a statement rejecting a proposal to assess a fee on persons who are not connected to the county sewer system. That proposal, commissioners said, was circulated "by certain of the county's sewer creditors and bond insurers as a means of generating additional revenue for payment of county sewer debt."
"We do not support the placement of a fee on persons who are not connected to and do not use the county's sewer system," the commissioners said in the joint statement.
In some parts of the country, residents and businesses are required to connect to sewer systems either as new homes and businesses are built or when septic systems are phased out. Jefferson County has no such requirement.
Financial Guaranty Insurance Co. and XL Capital Assurance Inc., which both lost their triple-A ratings, insure most of the sewer debt. FGIC now is rated BBB, Baa3, and BB by Fitch Ratings, Moody's Investors Service, and Standard & Poor's, respectively. XLCA is rated BB, A3, and A-minus, respectively. FGIC and XLCA teamed up and hired a group of experts to help negotiate with Jefferson County.
Financial Security Assurance Inc., which remains triple-A rated, insures $352 million of Jefferson County's sewer debt and also is negotiating with the county.
The county has 13 separate interest rate swap transactions with Bank of America NA, Bear Stearns Capital Markets Inc., JPMorgan Chase Bank, and Lehman Brothers Special Financing Inc. covering an aggregate notional amount of approximately $5.4 billion.