JeffCo Sewer Warrants Dropped to D, Loss Risk Elevated: Analysts

BRADENTON, Fla. — Bank of New York Mellon’s suspension of bankrupt Jefferson County, Ala.’s sewer warrant payments prompted Standard & Poor’s to drop its credit assessment to the bottom of the rating scale Friday.

S&P lowered its underlying ratings on the sewer debt to D from C, affecting $3.1 billion of outstanding defaulted sewer warrants.

Because the trustee stopped payment on all the debt, Moody’s Investors Service last week said investors are now subjected “to the risk of higher losses.”

“We plan to review the implications of the suspended payments on expected recovery and determine whether it will impact the county’s Caa3 sewer warrant rating,” Moody’s analyst Dan Seymour said Thursday.

Meanwhile, trustee BNY Mellon filed a motion with the bankruptcy court seeking to accelerate the sewer debt, and a complaint asking Judge Thomas Bennett to determine the responsibilities of insurers if the warrants are accelerated, among other issues.

One of several sewer warrant insurers, Assured Guaranty Municipal Corp., said it disagreed with BNY Mellon's decision to halt all payments, including those from insurance.

Assured said that it would take steps necessary to ensure that holders of AGM-insured sewer warrants would receive scheduled debt service payments in a timely manner. AGM said it paid amounts due on Feb. 1 to the Depository Trust Co., and expected DTC would credit warrant holders' accounts.

Jefferson County filed the largest municipal bankruptcy in the country Nov. 9, 2011, with more than $4 billion of outstanding warrants. Most of the debt is composed of sewer warrants, which include about $2 billion in auction-rate mode and $792.36 million in variable-rate mode now held as bank warrants.

The bank warrants had already been accelerated by virtue of defaults, and all principal has been due for some time. However, bank warrant holders agreed to forbearances of their principal payments.

BNY Mellon notified investors that all payments — including those from insurance — would be suspended Feb. 1 because bank warrant holders would no longer agree to delay their principal payments.

Money in the debt service fund, and available through insurance policies, was not enough to pay the $792.36 million in bank warrants as well as $18.2 million due on other maturing securities or mandatory sinking fund redemptions Feb. 1, BNY Mellon said.

The reversal of concessions by bank warrant holders and postponement of all payments introduces “uncertainty surrounding the magnitude of investor losses,” according to Moody’s.

“Our underlying ratings on Jefferson County’s various defaulted obligations, which do not incorporate payments from municipal bond insurance policies, depend on our expectations for severity of loss, under a 'loss given default’ analysis,” Seymour said. “The trustee’s suspension of payments casts further doubt on the likelihood of ultimate recovery for sewer warrant holders, introducing more uncertainty into the 'loss given default’ analysis.”

Last week, BNY Mellon filed a motion with the court seeking permission to accelerate all of the sewer debt. If that occurred, the principal on all modes of the outstanding debt and maturities would become immediately due and payable.

Because debt-service payments have stopped, “the trustee believes it is both equitable and in the best interest of the parity security holders that the trustee have the discretion to accelerate the parity securities,” BNY Mellon said in the motion.

The acceleration would not apply to warrants insured by Financial Guaranty Insurance Co., and Assured Guaranty Municipal Corp., unless the insurers consented.

The trustee said disagreements have arisen with FGIC and Assured over the interpretation of the indenture, and its effect on the bond insurance policies if the warrants are accelerated.

A preliminary hearing on the motion to accelerate the warrants is set for March 7 in Birmingham federal court.

BNY Mellon also filed a complaint for declaratory judgment in a separate adversarial proceeding last week, which is a proceeding outside the core bankruptcy case used to determine certain conflicts.

The complaint asks bankruptcy Judge Thomas Bennett to determine if the trustee has the authority to accelerate Jefferson County’s sewer warrants without the consent of Assured and to determine what effect acceleration would have on the county, the trustee, investors, and insurers.

Bennett is also being asked by BNY Mellon to determine bond insurer’s obligations if the warrants they insure are accelerated.

A status conference on the trustee’s complaint will be held March 7.

For reprint and licensing requests for this article, click here.
Bankruptcy Alabama
MORE FROM BOND BUYER