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Jefferson County GO Warrants Also Dicey

BRADENTON, Fla. — Since Jefferson County, Ala., filed the county’s largest municipal bankruptcy in history last week, attention has largely focused on the county’s $3.14 billion of nonrecourse sewer system debt. But Moody’s Investors Service said Monday that the county’s general obligation warrants are potentially at risk because warrant holders must get in line with thousands of unsecured creditors to get paid.

Alabama’s largest county, and the seat of Birmingham, put $200.5 million of GO warrants into bankruptcy along with sewer, school, and other revenue warrants, after failing to reach a settlement with creditors to restructure the sewer debt.

The county’s total outstanding debt is more than $4 billion.

Jefferson County is in default of its variable- and auction-rate sewer warrants, and $105 million of variable-rate GO warrants, both of which are under accelerated payment schedules that helped pushed the county to seek relief under Chapter 9.

Municipal bankruptcy law treats the various classes of debt differently, influencing default risk and potential losses, according to Moody’s senior analyst Christopher Coviello.

“The risks to GO bondholders are greater now than prior to the filing because municipal bankruptcy law treats GO debt as an unsecured obligation unless there is a statutory lien, which does not exist for GO debt in Alabama,” he said. “Therefore, it’s likely that GO bondholders will have to compete with other unsecured creditors in a reorganization of the county’s obligations.”

The county has four outstanding series of GO warrants, secured by its full faith and credit, that are at the top of the 20 largest unsecured creditors, and there are more than 5,000 creditors, according to court documents.

“The court is likely to consider sewer bondholders as secured creditors given that a statutory lien on sewer revenue secures that debt,” Coviello said. “Still, it’s doubtful that sewer bondholders will be fully repaid since annual sewer revenue of $298 million is well below the amount needed for timely repayment of the $3.1 billion of outstanding sewer debt.”

Holders of $814 million of outstanding school warrants are likely to be repaid due to a statutory lien on a dedicated sales tax securing that debt, he said.

The school warrants are in technical default due to covenant violations, though they are not in payment default.

If the court approves the bankruptcy filing, Coviello said the risk that fixed-rate bondholders will see temporarily disrupted debt-service payments increases because the federal judge may impose a stay on payments while the bankruptcy process unfolds.

“The bankruptcy filing is credit negative, given the uncertainty it creates for bondholders and the potential disruption of debt service payments,” he noted.

On Friday, Moody’s began reviewing all of Jefferson County’s ratings for possible downgrade in light of the bankruptcy filing.

The action applies to the Caa3 rating on the sewer revenue warrants, the Caa1 rating on GO warrants, and the Caa2 on $83.64 million of lease-revenue warrants.

Standard & Poor’s also took action Friday, dropping the school warrants five notches to B from BBB-minus.

All Standard & Poor’s ratings were placed on CreditWatch with developing implications due to uncertainty about whether debt-service payments would be made, according to analyst Brian Marshall.

Standard & Poor’s currently has a C rating on the sewer warrants. The agency lowered the GO warrants to C from B, the lease-revenue warrants to C from B-minus, and downgraded to C from B the Series 2000 limited-obligation school warrants secured by lease payments from the Jefferson County Board of Education.

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