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Jefferson County, Ala., Approves Plan to Exit Chapter 9 Bankruptcy

BRADENTON, Fla. - The Jefferson County, Ala., Commission Tuesday approved a plan that is expected to lead it out of Chapter 9 bankruptcy by the end of the year.

The bankruptcy plan support agreement with JPMorgan, bond insurers, and seven hedge funds represents about $2.4 billion, or 78%, of the county’s outstanding sewer debt, said Commissioner Jimmie Stephens.

If approved by the court, JPMorgan would recover approximately 31% of its $1.218 billion investment.

Bond insurers would recover just over 60% and hedge funds would recover about 83% while liquidity banks and other warrant holders would recover 80% of their investments. The county did not provide the amount of debt each creditor class holds though a total of $3.1 billion of sewer debt is outstanding.

Stephens said the ultimate rate of return for investors will depend on whether they seek recovery from bond insurers. He did not provide specifics, but all of the sewer debt is insured except for $11.69 million of fixed-rate sewer warrants.

The deal requires Jefferson County, with junk ratings at all levels, to refinance the debt.

It also requires Jefferson County to raise sewer rates 7.41% a year for the first four years. Rate increases after that will depend on the level of capital spending and other factors but are projected to be no more than 3.49% a year, according to a term sheet released by the county Tuesday.

Raising sewer rates has been controversial particularly because many of the sewer system’s customers have low incomes.

“If this is approved by the judge, this debt and this problem is fixed, and that’s the way we’re going to sell it,” Stephens said, referring to selling the deal to the bond market. “It has to be blessed by the bankruptcy judge.”

The plan support agreement will be presented in court Wednesday during a hearing on the county’s plan to adjust its debts, Stephens said.

The county’s term sheet says the plan negotiated with sewer system creditors is “significantly” better than a proposal the county rejected prior to filing for bankruptcy in November 2011. The new deal saves ratepayers more than $200 million in creditor payments compared to the previous agreement, the county said.

Public Financial Management Inc. was hired to assist in the plan support negotiations, according to Stephens.

The county will to issue a request for proposals and seek bids from firms interested in assisting the county in the refinancing, he said.

The transaction will result in creditors receiving about $1.835 billion of new sewer warrants. Certain creditors will receive about $13 million to guarantee that any remaining unsold warrants up to $185 million will be purchased, subject to various conditions.

“We will try our best to talk to the different investment bankers, underwriters, the insurers, and the rating agencies,” said Stephens.

Whether the refinancing is marketable depends on demand, said Municipal Market Advisor managing director Matt Fabian.

“It is a testimony about how desperate people are for yield and how desperate some banks’ strategies have become,” he said, adding that he would not advise his readers to buy the bonds because the county has historically resisted raising rates to support the sewer debt.

“I think that [the county’s] story has been too sordid to be optimistic yet,” Fabian said. “At least the agreement is a positive step and if the advisors believe the plan is reasonable then I have no reason to disagree. There’s execution risk more than anything else.”

Assured Guaranty, one of several insurers of the county's sewer debt, said in a statement that "the conditional Jefferson County agreement provides a framework for resolving the county’s sewer indebtedness."

"As of March 31, 2013, Assured Guaranty's direct and assumed net exposure to the sewer warrants was $464 million," the statement said.  "If the conditional agreement is implemented, Assured Guaranty's losses are expected to be within already established reserves."

The term sheet released by the county specifically said that JPMorgan “has given extra concessions to increase the recovery of other sewer creditors,” and notes that the bank’s concessions are on top of $75 million paid to the county and the waiver of $647 million of claimed swap termination fees as part of a settlement with the Securities and Exchange Commission.

JPMorgan declined to comment.

“There are still many, many things pending,” Stephens said, referring to other details the county must address in the plan of adjustment. “All the stars have to align but we’re in a much better position than this time yesterday.”

When asked about circumstances that changed in the last 24 hours that produced the agreements with creditors holding the sewer debt, Stephens said, “There’s a window of opportunity in each deal you have based on market rates and interest rate conditions. This was the right time.”

The county already has reached agreement on three series of its general obligation warrants.

Stephens said the county is close to reaching an agreement with creditors holding $1.11 billion of school warrants.

Jefferson County filed the largest municipal bankruptcy in the country in November 2011 with $4.2 billion of outstanding debt.

If all goes as planned Alabama’s largest county could emerge from bankruptcy by the end of this year, Stephens said, adding that the plan of adjustment will also address outstanding adversarial suits and appeals related to the Chapter 9 case.

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