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Fitch Gives Junk Ratings to Jefferson County's $1.7B Sewer Deal

BRADENTON, Fla. Citing fundamental concerns about bankrupt Jefferson County, Ala.'s upcoming $1.7 billion sewer warrant sale, including the risk of political interference, Fitch Ratings assigned preliminary below-investment grade ratings to the deal Tuesday.

The transaction's $500 million of senior revenue warrants received a BB-plus rating from Fitch, a notch below investment grade, while $1.23 billion of new subordinate-lien warrants were rated a notch lower at BB.

Fitch said its ratings will become permanent once the county sells the debt, exits bankruptcy, and begins to implement the plan, including refunding $3.1 billion of outstanding sewer warrants for $1.7 billion in new 40-year warrants.

However, a "significant concern" is the projected cash-flow shortfall for the sewer system's capital needs beginning in 2024, Fitch said. Other concerns include high debt levels, back-loaded debt payments, and the risk that sewer revenues will not be protected, as anticipated, by the approved Chapter 9 exit plan.

"The approved rate structure adopted by the County Commission, which calls for annual rate adjustments through the life of the warrants, is a key credit positive as it provides more certainty to the projected cash flows," according to Fitch analyst Doug Scott.

"However, rates are already high and ongoing adjustments contemplated under the [rate structure] could spark increased political concerns, litigation, and elasticity in usage, any of which might erode actual financial results," Scott said.

Jefferson County's sewer rates have been the subject of several lawsuits, including two that may be discharged as part of the county's Chapter 9 plan of adjustment. Several years ago, a prior County Commission struck down an ordinance that promised to implement the rate increases necessary to support the sewer system's current debt, which is now in default.

A super-majority of current Jefferson County commissioners, however, have said they are determined to repair the county's finances, exit bankruptcy, and move forward.

Commissioner Jimmie Stephens said in a recent interview that the plan provides for 10 years of capital expenditures, including those required to fulfill the current federal consent decree.

Stephens also said that due to the different structure of the upcoming deal, using a gross as opposed to previous net pledge of revenues, and with promised rate increases along with other security enhancements, similarly structured deals would most likely would receive ratings in the A-category.

Not so for Jefferson County. Last week, Standard & Poor's assigned preliminary investment-grade ratings of BBB to the senior warrants and BBB-minus to the subordinate-lien warrants citing some of the same concerns as Fitch did.

The senior revenue warrants are to carry insurance from Assured Guaranty Municipal Corp., which is rated AA-minus by Standard & Poor's and A2 by Moody's Investors Service. Jefferson County plans to sell the new warrants the week of Nov. 18 with Citi as the book-runner.

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