Jefferson County Officials Waiting for Plan to Make Warrant Payment

BRADENTON, Fla. - Jefferson County, Ala., officials today expect a report from their finance director on how to come up with $20 million for the first accelerated payment on $120 million of variable-rate general obligation warrants that are now being held by two banks.

The warrants are secured by the county's full faith and credit - representing a liability some consider more onerous than the county's troubled $3.2 billion of sewer debt.

County Commission president Bettye Fine Collins reportedly told local media yesterday that the county could make a $10 million payment on the GO warrants if creditors JPMorgan Chase and Bayerische Landesbank Gironzentrale would agree to extend forbearance agreements on the debt that are set to expire at 5 p.m. Central Time Oct. 31.

Collins has said that the GO warrants are part of a sewer debt restructuring plan negotiated by Alabama Gov. Bob Riley. That plan hasn't gotten very far because state lawmakers have refused to consider allowing the county to use excess funds from an existing local sales tax dedicated to education projects to supplement sewer revenues.

Meanwhile, state officials have run into their own problem with JPMorgan, which has exercised a swap option that would force the Alabama Public School and College Authority to issue variable-rate refunding bonds during some of the worst market volatility ever seen.

State officials said they will ask a court what their options are regarding the contract they signed with the investment bank in March 2002, and for which they received an up front payment of $12.58 million.

The authority, which issues debt for school construction throughout Alabama, is overseen by Riley, state finance director Jim Main, and state school superintendent Joe Morton. They voted Wednesday to seek a declaratory judgment to clarify the authority's responsibilities under the swap agreement.

The authority wants to "best fulfill its obligations in regard to the swaption," Main said in a statement following the meeting. "Neither the actions authorized by the [authority] nor the swap agreements between the [authority] and JPMorgan Chase, in any way affect the authority's obligation or ability to continue making timely payments of debt service on any of the authority's outstanding bonds."

The swap agreement, entered into March 13, 2002, and amended Jan. 16, 2003, granted JPMorgan the option to require the authority to enter into a fixed-to-variable interest rate swap on Nov. 1, and JPMorgan has exercised that option, Main said.

That means the authority must enter into a swap and issue variable-rate bonds or pay an estimated $20 million to $25 million to terminate the swap agreement.

Not only would refinancing be difficult in current market conditions, but state officials said it could violate a state law that prohibits refinancing bond issues unless the transaction results in present-value savings of at least 3%.

The option applies to a $300 million revenue bond issue the authority sold in 1998, although the swap agreement with JPMorgan covers four bond issues the authority sold in 1998 and 1999 for notional amount of $710.2 million.

Other bonds the authority sold that are also covered by the swap agreement are $18.4 million of bonds, Series 1999A, $250 million of bonds, Series 1999C, and $172.7 million of bonds, Series 1999D, according to the state's annual financial report.

In return for a lump sum payment, the authority gave JPMorgan options to enter swap transactions on the bonds where the authority would make a fixed-rate payment to JPMorgan. JPMorgan would make variable-rate payments to the county, which initially were based on 70% of the London Interbank Offered Rate. In January 2003, the agreement was amended to change the variable-rate payments to 67% of Libor, the state's financial report said.

The swap agreement terminates Sept. 1, 2029, but it gives JPMorgan options that are exercisable in the years 2008 through 2011. The swap agreement had a negative fair value of approximately $47.26 million as of Sept. 30, 2007, the financial report said.

Alabama reported in its 2003 financial report that the authority was amortizing the up-front payment it received from JPMorgan as an adjustment to interest expense over the life of the option.

Swap Financial Group LLC assisted the state in negotiating the original swap agreement, and the amended swap, according to those documents.

JPMorgan spokesman Brian Marchiony said the firm declined to comment.

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