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Jefferson Co. Fires Merrill, Two Others

BRADENTON, Fla. - Jefferson County, Ala., commissioners yesterday fired top negotiators working on the county's $3.2 billion sewer debt crisis, including Merrill Lynch & Co.

The county had hired Merrill just over a month ago to serve as financial adviser with respect to refinancing the troubled sewer debt.

The commission voted 3 to 2 to pass a resolution terminating Merrill Lynch, the county's other financial adviser, Porter White & Co., and the law firm of Bradley Arant Rose & White LLP, saying the trio submitted an "unacceptable" proposed restructuring plan and that the cost of employing them "exceeds the value of the results being produced."

Porter White and Bradley Arant will be retained to advise the county on matters other than the sewer debt program, according to the resolution.

Less than two weeks ago, county commissioners released to the media a one-page "Overview of Strategic Plan" outlining a proposal concerning the county's $3.2 billion of sewer warrants, most of which are variable- and auction-rate securities insured by downgraded bond insurers and covered by out-of-synch swaps.

The outline suggested that the commission consider raising sewer rates 2.85% per year, use a "general fund subsidy of up to $10 million for sewer operating and maintenance" expenses, and establish an oversight board with rate-making responsibilities. The plan was not acted upon by commissioners.

The resolution commissioners adopted yesterday "appoints an investment banking group to underwrite the debt securities necessary to refinance the sewer debt and to provide the county such ancillary advice and assistance as are customary in connection with such an underwriting."

Morgan Keegan & Co. and Sterne Agee & Leach Inc. are specifically named in the resolution as part of the investment banking group, with a third firm to be appointed.

In a statement released late yesterday, Morgan Keegan said it was asked by the Jefferson County Commission "to participate in the solution for the county's sewer bond situation."

"As the leading municipal bond underwriter in the South Central United States, and the 10th largest underwriter nationally, Morgan Keegan is a recognized expert in municipal finance and has a deep understanding of Jefferson County's needs," the firm said. "We look forward to getting to work immediately on helping execute a plan that puts the sewer system on a solid foundation and provides a solution that is fair to all parties: the county and its residents and ratepayers, the banks, and investors in the county's debt."

Sterne Agee referred media calls to commissioner George Bowman, who could not be reached by press time.

The resolution states that "members of the underwriting group shall work without compensation from the county other than such customary and reasonable underwriting fees to which they shall be entitled if and when they succeed in selling the debt securities necessary to refinance the sewer debt, which fees shall be hereinafter negotiated between the county and such underwriting group."

It also prohibits members of the underwriting group from functioning as a financial adviser to the county "within the contemplation" of the Municipal Securities Rulemaking Board's Rule G-23. The rule says a broker-dealer can only serve in the dual role as a financial adviser after disclosing to the issuer that conflicts of interest exist and the amount of compensation expected.

An earlier version of the resolution, considered by commissioners last Thursday, said that Goldman, Sachs & Co. would be part of the new underwriting team. However, the firm's name was not in a revised resolution before the commission yesterday, which was obtained from the office of commission president Bettye Fine Collins.

Jefferson County is reserving the right to employ a financial adviser in connection with the sewer debt restructuring.

Commissioners Jim Carns and Bobby Humphryes voted against the resolution yesterday. Humphryes proposed an amendment to the resolution that the new team not be allowed to use gaming or gambling as methods of raising revenues to pay off the sewer debt. The amendment failed when it was ruled out of order.

The idea of instituting some kind of gaming as a way of raising revenues came up at the commission's finance committee meeting on Monday.

Jefferson County has forbearance agreements with swap counterparties and banks, which were forced to hold $850 million of variable-rate warrants after failed debt remarketings. When insurers were downgraded, repayments on the variable-rate debt were accelerated. The county also had failed auctions on some of its auction-rate securities resulting in higher interest rates. Because of market problems, the county's debt service could nearly double.

Since the turmoil began, Moody's Investors Service and Standard & Poor's have downgraded the underlying ratings on the county's sewer debt to junk status. The forbearance agreements expire Aug. 1.

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