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Jeffersonian Dissent

BRADENTON, Fla. - Jefferson County, Ala., is taking issue with Standard & Poor's recent downgrade of some of its troubled sewer warrants to D from CCC because a principal payment date wasn't met April 1.

The rating action affected approximately $300 million of Series 2003B-2 through 2003B-7 sewer revenue refunding warrants with underlying ratings from Standard & Poor's

In a disclosure released late Wednesday, Jefferson County said neither the Series 2003 B-2 through Series 2003 B-7 warrants in question nor the trust indenture pursuant to which they were issued contains any requirement or other provision for an April 1 principal payment.

A payment is only required in several standby warrant purchase agreements, the disclosure said.

"We take a rating down to D if a payment on principal or interest is missed by the date its due according to the terms of the documents and the standby warrant purchase agreements would be included in the transaction documents," Standard & Poor's analyst Sussan Corson said yesterday.

Wednesday's disclosure notice also noted that the county and parties to the liquidity facilities entered into forbearance agreements which provided, among other things, that the absence of a $53 million principal payment by the county on April 1 would not be regarded as a default. The agreement allowed the county to make an interest-only payment of approximately $4.2 million.

"Consequently, the county maintains that no default has occurred with respect to the Series 2003 B-2 through Series 2003 B-7 warrants or with respect to any other warrants issued and outstanding under the trust indenture," said the disclosure.

According to Standard & Poor's ratings definitions, an obligation rated D is in payment default. The D rating also is used when a bankruptcy petition is filed or a similar action jeopardizes payments.

"Under these stressful circumstances a payment wasn't made," Corson said. "It's more about the missed payment and not about a legal event of default under the documents."

Standard & Poor's maintained a CCC underlying rating on approximately $1.7 billion of Series 2003B-1-A through 2003B-1-E and Series 2003C-1 through 2003C-10 of auction-rate sewer system revenue bonds since payments are being made on those obligations.

The agency is maintaining a CreditWatch on all the county's debt primarily because some officials have discussed the possibility of the county filing for bankruptcy, Corson said.

Moody's Investors Service currently rates Jefferson County's sewer warrants Caa3.

Insurer downgrades have led to failed remarketings of the county's $847 million of variable-rate demand sewer debt and failed auctions on some of its $2.2 billion of auction-rate securities resulting in significantly higher interest rates and technical defaults on swaps.

County officials are negotiating with banks, liquidity providers, and swap counterparties on ways to resolve the financial crisis, including using excess sales tax revenues to help pay the escalating sewer debt service. However, that would require an act of the Alabama Legislature.

The financial crisis led one major bond insurer to question whether to insure debt in Alabama, signaling that other local governments and even the state may suffer from Jefferson County's plight.

When asked about potentially broader impacts to the rest of the state, and if Alabama laws regarding bond issuance and the use of derivatives should be strengthened, state finance director Jim Main on Tuesday declined to comment.

"The state of Alabama is concerned about the Jefferson County situation, but does not believe it is appropriate to make comments at this time," Main said in an e-mail.

 

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