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Jefferson County Has 1st Missed Payment

BRADENTON, Fla. - Jefferson County, Ala., disclosed what is believed to be the county's first missed payment to owners of its sewer warrants after defaulting on $46 million of accelerated principal that was due last week.

The county blamed Syncora Guarantee Inc. for failing to pay on its bond insurance policy, but also said in a material event notice released late Tuesday that the county's net sewer revenues were insufficient to pay debt service.

Jefferson County owed $71 million on July 1 as an accelerated principal payment on outstanding variable-rate sewer warrants.

Financial Guaranty Insurance Co. paid $25.36 million on its portion of the insured warrants because the county said sewer revenues were not sufficient to make the payment. But Syncora, formerly XL Capital Assurance Inc., did not pay on its portion of the insured debt.

"Syncora has suspended payment on its insurance policies," the county's notice said in part. "As a result, the $46,056,250 aggregate principal amount of Syncora-insured warrants called for redemption on July 1, 2009, was not paid by either the county or Syncora."

Syncora suspended paying claims in April in an agreement with the New York Insurance Department, which regulates the insurer. The suspension was to give Syncora time to reduce its structured finance exposures and meet its minimum capital requirements.

The insurer is in negotiations with a fund attempting to buy Syncora's troubled residential mortgage-backed securities. The latest in a series of deadlines for a tender offer for the RMBS is tomorrow. However, a master agreement between Syncora and the fund calls for a final agreement to be reached by next Wednesday.

"We're not allowed to pay claims because of the order by the New York Insurance Department, and that includes municipalities or RMBS," said Syncora spokesman Michael Gormley when asked for a comment about not paying Jefferson County's insurance claim.

In a disclosure in late May, Syncora said it had failed to pay claims totaling $61.7 million on eight insurance policies since suspending claims payments, but the insurer was not specific about whether they were claims for municipal bond or RMBS insurance.

"Other than Syncora, I am unaware of any bond insurance company failing to make its payments," said Jeffrey Cohen with Cohen & Associates PC, a Denver law firm whose specialty includes municipal debt restructuring and bankruptcy.

Cohen went on to say that the tenuous financial situation in Jefferson County seems to be getting worse with news of the payment default.

The county has approximately $3.2 billion of troubled sewer debt, of which about $800 million is in variable-rate demand mode while the remainder is in auction-rate mode.

Since the county began negotiating with creditors to restructure the debt early last year, much of the variable-rate debt is either held by a syndicate of banks or has been redeemed and now owned by insurers.

Because the sewer warrants are non-recourse debt, last week's payment default will not increase remedies available to the bondholders but it could increase financial pressures on the county, Cohen said.

"Because there's been a principal default all of the [variable-rate sewer] debt could be accelerated, I'm sure, at the option of the holders," Cohen said. He added that the default could also trigger acceleration payment demands on some of the county's other debt depending on how those deals are structured.

Jefferson County officials did not respond to a request for comment about the default or its financial status, which grows more precarious each day because of the problematic sewer debt and severe budget problems created when a local judge struck down an occupational tax that supported one-third of the general fund revenues.

In response to the loss of the occupational tax, the county now is considering laying off or firing hundreds of employees, eliminating county services such as code enforcement, and closing satellite court facilities.

Last year, the county asked Alabama Gov. Bob Riley to facilitate negotiations with creditors to restructure the sewer debt. The governor's office could not be reached for comment about how the state might assist its most populous county now that it has defaulted on its debt.

And any restructuring will be difficult because of Jefferson's low ratings, which plummeted partly because of continued concerns that the county might file for the largest municipal bankruptcy in U.S. history.

Moody's Investors Service rates the county's sewer debt Caa3, while the county's general obligation debt is rated Caa1.

Standard & Poor's maintains split ratings of C and D on the county's sewer debt. The agency's rating on the county's fixed-rate general obligation bonds is B, while approximately $120 million of variable-rate GO bonds are rated D.

Dan Seymour contributed to this story.

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