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Alabama Issuers Brace for Jefferson County Fallout

DALLAS — Alabama issuers should not see their ratings lowered by the Jefferson County bankruptcy action, but investor perception could take its toll on future issues.

Chris Coviello, vice president at Moody's Investors Service, said it is unlikely that the Jefferson County bankruptcy will imperil the rating of other municipal issuers in Alabama or the region.

"We're not seeing this sort of problem in any other Alabama issuer that we rate, all of which are investment grade," he said. "It's not a trend that we are seeing, or expect to see."

"Jefferson County is a very unique situation," Coviello said. "It is just one of more than 11,000 issuers in the United States that Moody's rates."

Randall Taylor, finance director for Huntsville, sees no direct effect on his city's debt situation from the Jefferson County bankruptcy filing.

"We are not concerned," Taylor said. "Huntsville just doesn't have the same situation as in Jefferson County. We have a conservative budget, good reserves, and a great business climate."

Huntsville sold $112 million of general obligation bonds in a negotiated sale Nov. 7 that was oversubscribed for a number of maturities, Taylor said.

"We've seen little or no adverse effect on rates," he said.

"I'm sure there are people who are going to look at Alabama differently, and won't want to invest in any issuer in the state," he said. "The Jefferson County bankruptcy reflects on the entire state of Alabama, and that is not good.

Alabama issuers with strong ratings will be able to withstand the storm from the bankruptcy, said Phil Dotts, President of Public FA Inc. of Huntsville.

"In terms of how the Chapter 9 filing will affect the credit of other issuers, that is not an issue," he said. "It will not."

"The real question is the perception of investors and how the market will react to Jefferson County," Dotts said. "In life, the only reality is perception."

Some investors may seek to limit their exposure by avoiding Alabama municipal bonds to some extent or even entirely, Dotts said.

"If they do that, they are going to miss a lot of good credits that do not demonstrate the problems of Jefferson County," he said. "The market will determine what the fallout is going to be, and it remains to be seen."

The fact that investors have been interested in Alabama issues over the past few years is an indication that the collateral damage will be limited, Dotts said.

"The filing by Jefferson County was not a surprise to anyone who followed the market," he said. "It has been talked about as a possibility for at least three years and as a probability over the last three to five months."

Alabama will overcome any negative aspects of the Jefferson County debacle, Dotts said.

"This is not a good thing," he said. "But the state will do what it can to limit the damage and we will work to overcome the bad perceptions."

E. Lloyd Faulkner, finance director for Montgomery, said the Jefferson County bankruptcy will bring closer scrutiny of Alabama issuers by rating agencies and investors.

"Some issuers are not going to get as good of a rating as they have in the past," Faulkner said. "With the interest you pay based on those ratings, it is going to cost some people some money."

"It's going to be tougher," he said.

Faulkner said he has been quizzed by bankers and rating agencies about the city's relationship to Jefferson County as the city prepared its two latest bond sales.

"I do think that issuers are going to be scrutinized much more closely, with less leeway," he said. "If the general fund balances and reserves are not strictly within the parameters, then they might lose a tick or two from their ratings."

Montgomery has no plans to issue additional debt for another two years, Faulkner said.

"Maybe by that time this will halfway be blown over," he said. "Right now, it's not helping."

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