S&P Drops Jefferson County Sewer Debt Six Notches to B

DALLAS - Standard & Poor's lowered its underlying rating on Jefferson County, Ala.'s sewer debt six notches to B from BBB because of questions surrounding the county's ability to meet its debt obligations due to the resetting of interest rates on some variable-rate warrants.

On Feb. 25 the agency downgraded the credit to BBB from A, citing the financial pressures that analysts said could worsen. The system is highly leveraged through the use of mostly variable-rate and auction-rate debt. Last month, the county experienced eight failed auctions involving about $869.5 million of auction-rate warrants.

Moody's Investors Servicedowngraded the sewer warrants to Baa3 from A3 last week, as well. The downgrades triggered the termination of more than a dozen swaps entered into by the county.

In a disclosure notice last week, county officials said they may not be able to resolve the financial problems plaguing roughly $3.2 billion of outstanding sewer revenue warrants.

Officials said the county, the most-densely populated in the state, "can provide no assurance that net revenues from the sewer system will be sufficient to permit the county to continue to meet its debt service obligations at the current elevated levels or to provide other means of resolving the current situation."

Standard & Poor's kept the rating on CreditWatch with negative implications due to the "belief that significant financial pressures on the system will likely increase due to termination events triggered because of the issuer's downgrade" to junk status.

"Their initial budget shows adequate debt-service levels," said Standard & Poor's analyst Peter Murphy. "But the increased interest rates on the variable-rate securities and the need to post collateral or have an insurer post collateral by March 7, which is the end of this week, could further affect their debt-service."

According to the disclosure notice, about $184 million is needed to satisfy the swap agreements, and the county "can make no assurances that it can obtain the required insurance or post the necessary eligible collateral."

Further complicating matters is the recent downgrades of bond insurers XL Capital AssuranceInc. and Financial Guaranty InsuranceCo., which caused Jefferson County to default on liquidity facilities on its variable-rate warrants.

Once again, the county said it can make "no assurance that it will be able to provide a new surety bond, insurance policy or letter of credit, or the cash deposits" required by the trust indentures with the beleaguered bond insurance companies.

Due to the downgrades of the county's credit, some interest-rates on variable-rate demand warrants reset to between 3.08% and 10%, while the rates for the auction-rate warrants ranged from 3.92% to 6.25%.

The warrants are secured by the revenue of the system, and the county recently raised rates to correspond with projected debt-service requirements for this year, but that was prior to the downgrades and interest rates resetting.

"This is not due to a loss of net income nor higher expense costs," Murphy said.

The county expects interest rates for the final eight months of fiscal 2008 to be higher than budgeted and "may be significantly greater than" the current level.

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