Sell Side

XLCA Pays $10.6M To Banks

XL Capital Assurance Inc. yesterday made a payment of $10.6 million to the liquidity banks that provide the standby bond purchase agreements on Jefferson County, Ala.'s sewer warrants, sending a portion of the funds owed to the banks under the accelerated repayment of the county's variable-rate debt.

On Friday, the Jefferson County Commissioners agreed to make a separate $10.6 million payment to the banks under the latest 60-day forbearance agreement negotiated between the county, the bond insurers that guarantee its debt, the liquidity providers, and the banks that serve as counterparties to the county's $3.2 billion of debt.

The payments were part of the $53 million owed to the banks on April 1 under the accelerated repayment schedule, which requires Jefferson County to make 16 quarterly payments of $53 million each on the first business day of each quarter. The acceleration of the debt repayment is dictated under the conditions outlined in the terms of the liquidity facilities.

Under the agreement, the payment of the remaining $42 million due on April 1 and another $53 million due in July will be postponed until Aug. 1.

Jefferson County's debt obligations got into trouble when the recent credit crisis led to downgrades to bond insurer ratings, which caused the county's interest payments on its auction- and variable-rate debt to skyrocket. The increased debt service costs and out-of-the-money swaps for the cash-strapped county have threatened its ability to repay its sewer debt and could force it into bankruptcy.

The forbearance agreement delays any proceedings. It also delays Jefferson's obligation to reimburse XLCA for its payment, as the bond insurer agreed Friday that it would not pursue reimbursement until Aug. 1, according to a release. Under the insurance contract signed between XLCA and Jefferson County, the issuer would have to repay the insurer for any payments it makes.

XLCA's parent, Security Capital Assurance Ltd., announced the payment late Monday, saying it intends to make all of the payments required under the insurance contracts it has written for the Jefferson County sewer debt.

"XL Capital Assurance is committed to honoring the terms of the financial guarantee it provides to Jefferson County's bondholders," Edward Hubbard, an executive vice president at SCA and the president of XLCA, said in the press release accompanying the announcement. "The payment we are making supports the county's efforts to resolve its current circumstances."

The county continues to evaluate solutions to its problems, and XLCA's agreement to forego collecting the reimbursement is contingent on the county's good-faith efforts to address the crisis, SCA said. While the county is required to back the sewer warrants with sewer revenues, or raise rates if current revenues are not sufficient, commissioners have rejected proposals to raise rates or other fees.

"We understand that the county is pursuing constructive solutions to its debt situation and, while there can be no guarantee that the county will be able to reach a successful resolution of the current situation, we look forward to seeing additional progress made over the next 60 days," Hubbard said in the statement.

Over the last several months, failed debt remarketings forced banks to hold $850 million of variable-rate sewer warrants, while Jefferson County also experienced failures on some of its $2.2 billion of auction-rate securities.

As of Monday, XLCA had about $810 million in exposure to the county. The bond insurer has provided insurance on $837 million par of variable-rate and auction-rate sewer warrants issued in 2002, and on a portion of the $1.2 billion in sewer warrants issued in 2003.

XLCA has not established any loss reserves in connection with Jefferson County, the bond insurer's parent said.

The eight banks that provide liquidity facilities on Jefferson County's variable-rate date are JPMorgan Chase Bank, Bank of America NA,Bank of Nova Scotia, Societe Generale, Regions Bank, Bank of New York, State Street Bank, and Lloyds TSB Bank Plc.


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