BRADENTON, Fla. Bankrupt Jefferson County, Ala.’s lead attorney confirmed Tuesday that rising interest rates make it “almost inevitable” that the plan of adjustment for the county’s $3 billion in defaulted sewer debt must be renegotiated.
Kenneth Klee with Los Angeles-based Klee, Tuchin, Bogdanoff & Stern LLP first talked about the possibility of additional concessions in an interview with Bloomberg on Monday while county officials were consulting with rating agencies in New York about a $2 billion refinancing expected to take place in December after the county’s bankruptcy confirmation plan is approved.
The refinancing, as currently proposed, would allow some creditors to recover 65% to 80% of their investment in cash. They would get the lower amount if they make an insurance claim.
JPMorgan, the county’s largest creditor, would recover 31% of the $1.2 billion it is owed. The bank declined to comment on the discussion about additional concessions, JPMorgan spokesman Justin Perras said Tuesday.
If creditors won’t agree to additional concessions the county could seek an exchange of debt and lower returns, Klee told Bloomberg.
A source familiar with the creditors’ position told The Bond Buyer Tuesday that the conversation about adjusting concessions is premature since the refinancing contemplated is several months off.
“No one knows what rates might look like in the future so to try to modify the agreement now based on what may or may not happen is purely speculative at best,” the source said.
Klee said he agreed that talk of additional concessions is premature at this point.
“The dramatic spike in interest rates and the spread between munis and treasuries makes renegotiation almost inevitable, probably early-mid October,” he said in an email.
That’s because the refinancing plan hinges on sewer system rate increases proposed by the county that will raise base rates by $5. There will also be four annual rate increases of 7.89% followed by 3.49% yearly rate increases thereafter.
Those rates are included in a disclosure statement containing the county’s plan of adjustment, which was approved by U.S. Bankruptcy Judge Thomas Bennett on Aug. 6. Creditors are now voting on the plan, and ballots are due in October.
During the court hearing, Klee said rising interest rates would not support the refinancing plan, and that the sewer rates are as high as the county intends to increase them.
Since interest rates have increased there is a question about whether the plan can be confirmed as proposed, according to bankruptcy attorney John Whitlock, a partner with Edwards Wildman Palmer LLP. Edwards is not associated with Jefferson County’s case.
“In order for the plan to be confirmed it must be feasible, that is, the county must be able to issue the amount of debt that was proposed,” he said. “What the county and its counsel are saying to the creditors is that the creditors need to grant additional concessions or the plan can’t be confirmed because it is not feasible.”
Since the county has said ratepayers cannot pay more, the plan adjustment does not work without further discount on the existing warrants, and it is logical for negotiations to be reopened, said Whitlock. “The creditors may be miffed that they are being asked for further concessions, but they all understood the underlying assumptions of the current plan and may find it difficult to argue that the county mislead them.”
Jefferson County filed for Chapter 9 bankruptcy in November 2011 with $4.2 billion of municipal debt. While all principal payments would be made on general obligation, school, and lease revenue warrants under the proposed plan of adjustment, $3.1 billion of defaulted sewer warrants would be paid at a loss.
