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Jefferson Receiver Sought

BRADENTON, Fla. - With less than a week until the expiration of forbearance agreements that delay some of Jefferson County, Ala.'s sewer bond debt payments, insurers and the county's bond trustee Tuesday filed an emergency motion for the appointment of a receiver for the sewer system.

In a related move yesterday, Standard & Poor's slashed its underlying rating on the county's $120 million of Series 2001B general obligation variable-rate warrants to its lowest possible level, to D from B.

Meanwhile, U.S. District Court Judge R. David Proctor will hold a hearing by teleconference tomorrow on the emergency motion with attorneys from the four law firms representing the Jefferson County Commission and the plaintiffs. They include the trustee, the Bank of New York Mellon, and the two bond insurers that cover most of the $3.2 billion of outstanding sewer debt: Financial Guaranty Insurance Co. and Syncora Guarantee Inc.

In the emergency motion, the plaintiffs claim that there are continuing events of default by the county on its sewer debts, including $45.6 million in principal payments due to them on the sewer warrants. The plaintiffs also contend that appointment of a receiver is mandated under the indenture and warranted by Alabama law.

They argue further that if the receiver is not appointed, the objectives of the court's 1996 consent decree "may be jeopardized and the health and welfare of the residents of the county may be put at risk."

Jefferson County signed the consent decree with the federal court 14 years ago, agreeing to rebuild the area's sewer system to prevent it from polluting local bodies of water that supply drinking water.

"In direct contravention of its express contractual and legal obligations, the county has failed, repeatedly and intentionally, to increase the rates charged for county sewer services to generate revenues sufficient to pay its operating expenses and fulfill its obligations under the indenture," the emergency motion said in part.

"FGIC and Syncora [face] imminent harm by having to pay substantial additional amounts of money on account of the county's defaults and its refusal to take the appropriate actions to raise sufficient revenue to pay its debt obligations on the warrants," the motion states.

Although FGIC and Syncora agreed to forbearance agreements with other creditors, delaying some sewer debt and swap payments until Oct. 1, both insurers reserved their "rights and remedies" against the county. This gives the insurers the right to file the lawsuit seeking a receiver for the sewer system, which they filed last week. In the forbearance agreements, the county agreed it has defaulted on debt payments.

FGIC and Syncora have $1.19 billion and $809 million of net par exposure, respectively, to the county's sewer debt. So far, Syncora has paid $46 million on its policies on the county's debt. Municipal bond insurance contracts cover timely payments on principal and interest when an issuer cannot, and Jefferson County is contractually obligated to repay the insurers.

In separate affidavits filed in court Tuesday by Syncora managing director Drew Hoffman and FGIC managing director Timothy Tattum, the two stated that it's anticipated that on or before Oct. 1 "on account of the county's defaults" that claims will be made on debt service reserve policies in the amount of $12.1 million and $1.5 million, respectively, and on municipal bond insurance policies in the amount of $46.5 million and $25.4 million, respectively.

Tattum estimates that over the county's next fiscal year, which begins Oct. 1, it's anticipated that claim payments will need to be made by FGIC under debt service reserve and bond insurance policies in excess of $100 million, assuming that the county continues to default on the sewer debt. Hoffman states that Syncora could be called upon to pay more than $300 million on similar policies.

"The county has demonstrated that it is unwilling to take any actions to increase sewer system revenues," Tattum and Hoffman said in their affidavits.

Both men referred to two studies procured by the Jefferson County Commission in 2002 and 2003 to study the sewer system and its rate structure and said officials have failed to follow recommended sewer rate increases in both studies.

The county has rejected other suggestions made by bond insurers, such as a clean-water user charge on all water customers, including those with septic tanks who also benefit from having clean local water, the affidavits said.

Additionally, the bond insurance executives said Jefferson has also repeatedly suggested that it may have certain claims pertaining to the construction, financing, and operation of the sewer system. "However, the county has failed to pursue any action with respect to any such claims," Tattum and Hoffman said in their affidavits.

They said a receiver must be appointed to take certain actions that the county has failed to take, including reviewing the adequacy of sewer rates, considering additional charges and revenues, and investigating and prosecuting any bona fide claims pertaining to the sewer system.

"If a receiver is not appointed immediately to take the above actions, FGIC [and Syncora] will suffer irreparable harm as substantial revenues will continue to be lost, leaving insufficient funds to pay the county's sewer system debt obligations," both affidavits concluded.

The Bank of New York Mellon is being represented in the case by Waller Lansden Dortch & Davis LLP in Birmingham, while FGIC and Syncora are being represented by Adams & Reese LLP in Birmingham and King & Spalding LLP in New York.

Jefferson County commissioners on Monday authorized their attorneys at Bradley, Arant, Rose & White LLP in Birmingham to respond to the lawsuit seeking a receiver, which was filed last week. They authorized attorneys to file a counterclaim seeking up to $100 million in interest and $56 million in premiums the county paid for bond insurance

The saga in Alabama's most densely populated county- it has a population of more than 660,000 residents, including Birmingham - has dragged on since February when county commissioners began negotiations with creditors to restructure the troubled sewer debt that could ultimately force Jefferson into the largest municipal bankruptcy in the country's history. Gov. Bob Riley stepped in recently to help facilitate a possible restructuring of the sewer debt, and talks reportedly are continuing with creditors.

In addition, county commissioner Shelia Smoot this week suggested that the county seek assistance from their local congressional delegation, either in the form of a federal bailout or simply providing help in negotiations.

"Because of what's going on nationally, it seems like the line is getting longer for assistance and I don't see why Jefferson County, which is facing the largest municipal crisis, couldn't line up with them," Smoot said. "It's not far-fetched for us to say, 'Hey, is there anything you can do?'

"I think everybody understands our pain," Smoot continued. "I am saying it could be whatever anyone can do in Washington to help, even if it's dialogue with the bankers who are not wanting to relinquish their response in this." She said Washington lawmakers could assist by picking up the phone and assisting in negotiations.

Since the crisis began, the county's sewer debt has been rated at junk levels by Moody's Investors Service and Standard & Poor's, and most of the county's other debt has been dropped below investment grade as well.

The downward spiral continued yesterday when Standard & Poor's slashed its underlying rating on the county's $120 million of Series 2001B general obligation variable-rate warrants to its lowest possible level, to D from B.

The agency said it took the action "due to the county's failure to make a principal payment on the bank warrants when due on Sept. 15, 2008, in accordance with the terms of the standby warrant purchase agreement."

Although the county and liquidity banks entered into a forbearance agreement delaying payment until Sept. 30, Standard & Poor's said its policy is to lower the rating to D when payments are not made on the date due in accordance with the original documents.

Some of Jefferson's sewer warrants also are rated D because of non-payments under forbearance agreements.

The 2001B GO warrants, held by liquidity facility providers for at least six months now, are subject to accelerated repayment of principal and interest in six semiannual installments of $20 million. The first payment was due last week.

The county entered forbearance agreements on Friday with JPMorgan Chase Bank NA and Bayerische Landesbank, which agreed to forbear the first six-month payment until Sept. 30, according to a material event notice obtained from Digital Assurance Certification LLC.

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