BRADENTON, Fla. — Jefferson County, Ala., has proposed an aggressive timetable for exiting Chapter 9 bankruptcy this year but objections have been lodged before the judge overseeing the case can even confirm the schedule.
Objections to the county's disclosure statement and plan to adjust its debt have been filed by a local water board and a city, a group of elected officials and residents whose previous complaint was suspended, and ratepayers pushing back against proposed sewer system rate increases necessary to support the plan of adjustment.
U.S. Bankruptcy Court Judge Thomas Bennett will be asked Aug. 6 to approve the county's 822-page disclosure statement detailing facts about the county's condition and the plan of adjustment, which hinges on refinancing $1.9 billion of sewer warrants.
The judge will also hear arguments from objectors.
Jefferson County, the most populous county in Alabama, filed for bankruptcy in November 2011 citing $4.2 billion of warrants — $3.1 billion attributed to the insolvent sewer system. Warrants are similar to bonds.
In a revised disclosure statement filed Monday, the county said that "the compromises and settlements embodied by the plan [of adjustment] resolve many highly complex and uncertain issues that could take years and millions of dollars to litigate to finality.
"The comprehensive and final resolution of these issues under the plan provides for a fair and equitable result and greater distributions to the county's creditors, and offers the county and its sewer system a 'fresh start' from a history plagued by actual and potential litigations," the county said.
Generally, the county proposes to make creditors holding general obligation, school and lease warrants whole for principal, while making adjustments to indentures, redemption schedules, or, in the case of the lease warrants, extending the maturity schedule. In some cases, higher penalty interest rates that were imposed on variable-rate debt may not be paid.
The cornerstone of the county's plan is the restructuring of $3.2 billion of debt overburdening the sewer system, much of which consists of failed variable-rate demand and auction-rate warrants.
Through agreement with creditors of the county's sewer system, the largest being JPMorgan, the county said it will achieve more than $1.3 billion of concessions, which will reduce the sewer system's indebtedness to approximately $1.9 billion. Most of the concession will be made by JPMorgan, which agreed to reallocate its investment so others could achieve higher returns.
THE OBJECTIONS
The disclosure statement fails on multiple fronts to adequately address "financial information, data, valuations or projections" and risks that are relevant to creditor's decisions whether to accept or reject the proposed plan, the city of Bessemer and the Water Works Board of the city of Birmingham said in an objection filed Monday.
The Water Works Board provides billing for 113,000 of the county's sewer customers while Bessemer, a municipality in Jefferson County, also provides billing for 19,258 sewer customers.
Both entities say they are "parties in interest" to the bankruptcy case because they have "a pecuniary and practical interest in the long-term viability of the [county's] plan." They want to ensure that provisions are made for needed capital improvements, maintenance, operations, and rates so that the plan has a reasonable assurance of success and will not negatively impact their operations, they said.
In addition to a potentially "high residual financial risk" in the sewer system after the plan of adjustment is implemented, they point out that "the disclosure statement fails to identify in the financing plan sources of funds to pay for $1.2 billion in unfinanced capital spending requirements."
The Water Works Board and Bessemer also said that a proposed plan for refinancing sewer warrants later this year initially decreases outstanding debt to $1.9 billion or $13,000 per sewer system customer, but grows to a peak of $2.55 billion or $17,000 per customer because the deal may be structured using capital appreciation and convertible capital appreciation bonds, according to figures provided by Jim White, an investment banker and chairman of Porter White Capital Advisors Inc.
White said Tuesday that even though the county revised its plan this week to include more convertible capital appreciation bonds the increase in debt service is not materially different from that cited in the objection, though he pointed out that the County Commission recently proposed higher sewer system rate increases to support the plan.
Bankruptcy attorney John Whitlock, a partner with Edwards Wildman Palmer LLP, said it is not customary for the bankruptcy disclosure statement to contain as much detailed information about the county's ability to pay as would appear in a typical offering memorandum for the sewer warrants the county plans to issue later this year.
"The standard for disclosure in the disclosure statement is that there is sufficient information for the creditors who have to vote to make an informed decision about the plan," he said. "The county will be required to provide evidence that the plan is feasible, which will include evidence that it can issue the [warrants] contemplated by the plan.
"Ultimately, the court will have to decide how much detail is required for the creditors to make an informed decision."
Some of those who file objections may be parties in interest that may have standing to raise objections but they will not vote on the plan "so the effect on them is not a subject for the sufficiency of the disclosures," Whitlock said.
Other objections have been filed with the court.
A sewer system ratepayer from Hoover also complained in a letter to the judge that proposed increases in sewer rates were "unreasonable." He said the court should consider the concerns of the general public.
Late Tuesday, attorney Calvin Grigsby filed an objection to the disclosure statement on behalf of elected officials and citizens who have been litigating the bankruptcy case. Judge Bennett affirmed his suspension of further action in that case July 1.
Grigsby describes his clients as those who pay sewer fees, charges, and taxes as users of the county's sewer system, as well as ratepayer/creditors. Their $1.63 billion claim is listed as a general unsecured claim by the county.
In the objection, Grigsby said the county's plan is designed to "moot" the ratepayers' claims that much of the sewer system debt and derivatives were illegally issued.
"This proposed plan compromise does not go far enough and should be better," the objection filed by Grigsby said. "The disclosure statement does not notify creditors that for the plan to be confirmed, a necessary finding by the court will be that the plan has been proposed in good faith and not by any means forbidden by law or compromises on illegality."
Grigsby, who is also president of Grigsby & Associates Inc., has asked for an expedited hearing on his objection.
DEAL UNDERPINNINGS
Official sewer system creditors, including those who are not parties to the county's negotiated agreements approving the debt restructuring, will see a return on their investments between 65% and 80%. Creditors who choose to pursue insurance claims will receive 65 cents on the dollar, while those who forego insurance will be guaranteed 80 cents on the dollar.
In order for the sewer system debt restructuring to occur, the county plans to issue $1.9 billion of warrants soon after confirmation of the bankruptcy plan in December.
The county's revised disclosure plan shows that a plan is being considered to issue $1.3 billion of current interest bonds, $179.8 million of capital appreciation bonds, and $458.4 million of capital appreciation bonds that would convert to current interest bonds after about 10 years.
All of the new debt would have maturities in 2053.
The county said it is possible that the financing plan will be revised "one or more times before the confirmation hearing in light of altered market conditions and/or actual performance of the sewer system."
In the county's initial disclosure statement and plan filed June 30, the sewer system refinancing was to be supported by raising sewer rates 7.41% a year for the first four years with 3.49% increases each year thereafter.
Due to market conditions and lower-than-expected sewer revenues under a new rate structure, the County Commission on July 23 proposed revising the rates to support the upcoming financing.
The new rates increases base rates by $5 and calls for four years of 7.89% sewer system rate increases with 3.49% annual rate increases thereafter.
The commission said it anticipates holding additional public hearings on the rate increase in October, followed by a formal vote on adjustments. The new rates would go into effect Nov. 1.
Churches and community organizations are planning their own meetings to organize protests over the planned rate increases.
Sewer system ratepayers are not creditors of the county, so they don't vote on the plan, Whitlock said.
"The court may take their objections into account in deciding whether those who do have a right to vote will have sufficient information, but [the judge] should not consider the merits of the plan until the confirmation hearing, after the voting has been completed," he said.
Objections to the county's revised disclosure statement and plan must be filed with the court in Birmingham by Thursday.
If Bennett approves the plan and voting procedures on Aug. 6, ballots will be sent to all of the county's creditors. The county already has agreements from major creditors holding the sewer, school, lease, and GO warrants who have agreed to vote for the plan.
Ballots must be returned by Oct. 7.
A hearing confirming the plan is expected to be held Nov. 12, and the county is planning to officially exit Chapter 9 bankruptcy by Dec. 31.
