BRADENTON, Fla. - After more than seven months of negotiations, Jefferson County's major bond insurers and the trustee for bondholders have filed a lawsuit asking a judge to appoint a receiver for the Alabama county's sewer system, which is saddled with $3.2 billion of troubled debt and $5.2 billion of swaps.
The move comes after the county used debt service reserves to make payments on its sewer debt, prompting another rating downgrade.
The County Commission president responded to the suit by reasserting that the commission can't meet the terms demanded by creditors.
"We certainly prefer a resolution outside of bankruptcy," said Edward Hubbard, president of bond insurer Syncora Guarantee Inc., which filed the suit Tuesday along with bond insurer Financial Guaranty Insurance Co. and the Bank of New York Mellon, as trustee. "By filing suit, we're trying to identify processes outside of bankruptcy that would remove this from the political scrutiny this has received over the past seven months."
The suit, filed in the United States District Court for the Northern District of Alabama, asks the court to appoint an independent and qualified receiver to manage the sewer system as well as to seek and implement appropriate rate modifications and other sources of revenue, ensure compliance with applicable laws, assist in achieving an appropriate financial resolution, and pursue any bona fide claims.
Jefferson County commissioners during the past seven months have hired and fired experts working on a resolution to the sewer debt crisis and considered, then rejected, at least two debt restructuring plans. Most of the outstanding debt is in variable- and auction-rate securities which saw penalty interest rates rise as high as 10% as bond insurers were downgraded in the subprime meltdown.
According to sources familiar with the negotiations, creditors offered to forgo hundreds of millions of dollars in swap termination payments but those concessions were rejected when the commission could not get popular support for the overall restructuring plans.
Gov. Bob Riley, who stepped into the fray recently as a facilitator to continue negotiations, opened his office and offered creditors a new restructuring plan on Aug. 29. It reportedly offered no new revenues to restructure the principal debt, and required bond insurers to forgo some or all repayments owed by the county.
"Our perception is that the county issued a proposal on Aug. 29 which proposed an unrealistic degree of concession of its creditors," Hubbard said.
While Hubbard would not comment on specifics of the county's proposed restructuring plan, he did say, "The governor and the county have asked too much of the bond insurers."
"Part of the reason for filing our complaint is we think the county has sources of revenues available to it to help [meet] its obligations on the sewer revenue bonds that it hasn't fully explored yet," said John Williams, a managing director in public finance at Syncora.
Some market participants believe Jefferson County is not living up to the bond covenants to raise sewer rates to pay debt service. Bond documents for the outstanding troubled sewer debt sold in 2003 said the county expected to increase rates as much as 10% a year for five years.
While it is not clear if the county raised rates appropriately, a number of market observers believe Jefferson County violated its rate covenants, on which investors relied.
The dispute over Jefferson County's covenants, which are promises to investors, could have an impact on the municipal bond industry and hinder future non-general obligation bond deals, said Jon Schotz, partner and chief investment officer at Saybrook Capital LLC, a firm that buys distressed debt.
"This not only impacts on entities in Alabama, but it calls in question rate covenants by any general government entity," Schotz said. "This is a mainstream water and sewer financing, it's not a conduit deal. It's a general governmental function being filled by the use of these proceeds."
In response to the filing of Tuesday's lawsuit, County Commission president Bettye Fine Collins said she regretted that the bond insurers pursued litigation after the parties worked for months to find a settlement.
"The county will assert its rights and defenses which will include the fact that neither additional sewer rate increases or other sewer revenue enhancements are legally available to the County Commission," Collins said in a statement.
The governor's press secretary, Tara Hutchison, said Riley had no comment. She was not aware of any meetings scheduled with creditors.
Creditors presented a counteroffer to the county last week that reportedly sought funds outside of the sewer system revenues to pay off the debt, but the county reportedly rejected that counteroffer late last week.
Jefferson County commissioners have authorized their attorneys to prepare the paperwork necessary to file for Chapter 9 bankruptcy as a strategy to force concessions from creditors.
A formal bankruptcy filing may be accelerated by Tuesday's lawsuit, said Andreas Rauterkus, assistant professor of business at the University of Alabama at Birmingham.
"Clearly the bond insurers have very little faith in the county's willingness to settle their debt and are trying to force the county's hand," Rauterkus said. "It seems that the bond insurers want a judge to say that the county is not putting forward a good faith effort [to settle its debts]. Now the county might just have to file for bankruptcy to counter the move."
If a restructuring agreement is reached that does not require the county to pay-off all its entire loan amounts, its bond insurers could be forced to pay-out the difference, said Rauterkus, who added, "The bond insurers are the ones who have the most to lose here and are taking some preventive measures to protect themselves."
Jefferson County has negotiated half a dozen forbearance agreements delaying some payments, such as those owed on its swaps. While the current forbearance agreements are in effect until Sept. 30 between the banks and the county, Syncora and FGIC consented to the agreements but are not direct parties to them. Hubbard said insurers paid $47 million toward the county's debt obligations, in hopes that a restructuring agreement could be negotiated.
However, the county used its debt service reserve for debt service payments this month, prompting Standard & Poor's late Tuesday to drop its ratings to C from CCC on the county's series 1997A, 2001A, 2003 B1A through B1E, 2003 C-1 through C-10 sewer warrants. The agency also revised its credit watch to negative from developing.
The downgrade reflects the increased uncertainty of the county's continued timely payment on the obligations, said Standard & Poor's analyst Sussan Corson.
"The trustee calculates the available cash reserves will cover all but $100,000 of debt service payments due on the auction-rate bonds through the month of September," Corson said. "Upon depletion of the cash-funded debt service reserves, the trustee would request draws on the surety policies to cover additional debt service on the sewer revenue bonds."
Using debt service reserves to pay interest is a clue as to where the county is headed, Syncora's Hubbard said, adding: "We consider that to be a serious indication of the county's unwillingness to maintain debt service coverage."
