BRADENTON, Fla. – Jefferson County, Ala., plans to sell $1.723 billion of new refunding sewer warrants while still in bankruptcy, and before the confirmation hearing on the county’s plan of adjustment, county officials said.
Pricing of the warrants is expected to take place the week of Nov. 4, according to commissioner Jimmie Stephens, who has been involved in negotiations with creditors.
After the preliminary official statement is released, possibly Monday, County Commission President David Carrington plans to continue marketing efforts in New York, and mid-week some potential investors have been invited to the county seat in Birmingham for presentations and tours, Stephens said.
“We will try to explain to them it’s a new day in Jefferson County,” he said. “We will explain to them how the sewer debt has been stripped of fraud and corruption through the bankruptcy process.”
Ratings from two agencies are anticipated, though Stephens could not say which ones.
The plan will enable the county to exchange about $3.14 billion of defaulted sewer warrants for $1.7 billion in cash raised from the sale of new debt.
The deal is based, in part, on recently negotiated concessions with major bond creditors valued at about $300 million. The new haircuts are in addition to $1.3 billion creditors originally agreed to and include credit support for the warrants to be sold.
The agreements include haircuts, a 40-year letter of credit from JPMorgan worth about $140 million so the county can avoid borrowing to fund the debt service reserve, and $500 million of insurance from Assured Guaranty Municipal on a like amount of senior lien sewer revenue warrants secured by a closed gross lien on system revenues.
While exact details about the transaction’s structure haven’t been made available, Stephens said it will have senior and subordinate warrants, current interest bonds, capital appreciation bonds, and convertible capital appreciation bonds – a structure similar to what was previously announced.
The new warrants will have a gross pledge of revenues, as opposed to the net pledge on the debt that is currently outstanding.
“I believe that should give potential investors a little better comfort level,” said Stephens about the gross pledge. He also said that after pricing, closing of the warrants will be contingent on the county receiving confirmation on its plan of adjustment.
If the plan is confirmed, Jefferson County could be held in contempt if commissioners do not adhere to the new sewer system rate structure, he said.
The confirmation hearing is now scheduled for Nov. 20.
More details on the structure of the new warrants should be available in the county’s modified plan of adjustment, which is expected to be filed with the court by Wednesday.
“I’m not sure that [this] has been done before especially with this magnitude,” said Stephens, who has a background in finance and served as chairman of Birmingham’s Commercial Development Authority. The authority dealt with warrants, which are similar to bonds.
Selling new debt while in Chapter 9 could be yet another novel approach by Jefferson County. In a recent report, Moody’s Investors Service said the plan to issue new debt to redeem defaulted warrants at a loss to investors represented a novel approach in public finance.
The county originally indicated that the refunding warrants would be sold as soon as its final exit from Chapter 9, which is still expected in December.
“If the county sells the refinancing warrants before the confirmation hearing, that will satisfy the requirement that that aspect of the plan is feasible,” said bankruptcy attorney John Whitlock, a partner with Edwards Wildman Palmer LLP. Edwards is not associated with Jefferson County’s case.
“Feasibility of the plan is one of the requirements for confirmation, so selling the new warrants on which the plan is based will eliminate one of the key uncertainties facing the plan,” he said.
County commissioners on Thursday approved amended agreements with major creditors after recent weeks of negotiations brought about by volatility in the bond market and need for more capital to support the sewer system.
In an emergency motion filed Thursday with the court, Jefferson County sought and received a postponement of the confirmation hearing on the plan of adjustment until Nov. 20. The hearing was to be held Nov. 12, but the county said the slight delay “would allow the lead underwriter for the proposed new sewer warrants time to complete its marketing efforts prior to the start of the confirmation hearing.”
Citi is the book-runner for the deal.
Members of the syndicate are Drexel Hamilton LLC, First Tuskegee Capital Markets, Jeffries LLC, Loop Capital Markets, Merchant Capital LLC, Morgan Stanley & Co., RBC Capital Markets, Securities Capital Corp., Siebert Brandford Shank & Co.
Public Resources Advisory Group is the financial advisor.
Balch & Bingham LLP is bond counsel. Hawkins, Delafield, & Wood LLP is underwriters’ counsel.