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Jefferson County Adding Citi to Sewer Team

BRADENTON, Fla. - Jefferson County, Ala., now appears poised to add Citi as the third member of its new banking team to work on restructuring the county's troubled $3.2 billion sewer debt program, county officials said.

Goldman, Sachs & Co. was expected to be added to the team, which was initially formed last week with the hiring of Sterne Agee & Leach Inc. and Morgan Keegan & Co. Goldman and Sterne Agee had submitted a restructuring proposal to the county earlier this year.

"We're not pursuing business with the county," Goldman spokesman Michael DuVally said yesterday.

Citi had no comment about joining the county's new banking team, a spokesperson said yesterday.

After negotiating with Wall Street bankers, insurers, and rating agencies for months, the Jefferson County Commission last week suddenly terminated its relationships with its top negotiators on the sewer bond crisis - financial advisers Merrill Lynch & Co. and Porter White & Co., and the law firm of Bradley Arant Rose & White LLP.

The commission said it would continue to use Porter White and Bradley Arant in other capacities, but Porter White subsequently resigned as the county's full-time financial adviser.

The county has $3.2 billion of sewer debt, most of which is in auction- and variable-rate debt, that also is covered by $5.4 billion of out-of-synch swaps.

In addition to the sewer debt problems, Jefferson County also has general obligation and limited obligation school warrants that have experienced failed remarketings and auctions, according to the county's fiscal 2007 financial statements obtained yesterday from Digital Assurance Certification.

In a six-page note to the financial statements, the county details the higher interest rates it has experienced because of the disrupted bond market, as well as events of default with its outstanding sewer debt because of bond insurer downgrades and underlying rating downgrades on the sewer debt.

The note also discloses that $119.25 million of variable-rate demand GO warrants have been tendered to liquidity providers since March and have not been remarketed. While $128.1 million of auction-rate school warrants have maintained a triple-A insured rating, auctions on those warrants have failed since Feb. 20. And $188.88 million of variable-rate demand school warrants have been tendered to the liquidity provider as of May 30 and have not been remarketed.

Although the note says the county has retained advisers to explore restructuring or refinancing the sewer debt, it concludes: "An inability to restructure or refinance the sewer revenue warrants could have a material adverse effect on the sanitary operations of the county."

Jefferson County has forbearance agreements with banks and swap counterparties delaying payments through July 31.

Since the county's turmoil began earlier this year, Moody's Investors Service and Standard & Poor's have downgraded the underlying ratings on the county's sewer debt to junk status, and lowered ratings on some of the county's other debt.

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