Jefferson County, Ala.'s planned return to the municipal market two years after exiting bankruptcy may prove challenging, especially if the bonds arrive without external support, municipal analysts and investors said this week.
"I am not optimistic that time will heal wounds after that politically-motivated bond default and bankruptcy," said Dick Larkin, senior vice president and director of credit analysis at H.J. Sims & Co. "No issuer to my knowledge -- including Orange County, Calif. -- has been able to re-enter the market without some form of external support, like state backing or statutory law protection."
The county intends to sell new bonds in November or December. It emerged from bankruptcy protection on Dec. 3, 2013.
In early 2008 Jefferson County's $3.2 billion of variable- and auction-rate sewer warrants collapsed along with associated interest-rate swaps when liquidity in the bond market dried up amid the global financial crisis. After controversy over restructuring the sewer deals and a futile attempt to obtain a replacement revenue stream for the debt, the county ran out of liquidity in late 2011 and was forced into bankruptcy with a total of $4.1 billion of long-term debt.
The city of Detroit's $18 billion filing in July 2013 replaced Jefferson County's $4 billion debacle as the largest municipal bankruptcy in U.S. history. Now Jefferson County lawmakers have passed a bill that Alabama Gov. Robert Bentley signed last month that will provide capital funds for deferred repairs and new projects.
The bill will allow the county to refund about $595 million of limited-obligation school warrants secured by a dedicated sales tax. Those warrants are structured so that any tax revenues in excess of debt service requirements are used for early redemptions.
Acceptance will hinge on a multitude of factors, including market conditions, experts said.
"Liquidity for any post-bankruptcy credit can be thin," John Donaldson, vice president and director of fixed income at The Haverford Trust Company, said in an interview on Tuesday. "We would be concerned about the liquidity for this deal, particularly given thin overall market liquidity," Donaldson said. However, in the midst of planning its market return, the county is also embroiled in defending its reorganization plan, which has been under appeal from the start.
Some 20 volumes of documents were recently filed with the 11th Circuit Court of Appeals in Atlanta, setting the stage for county attorneys to argue that the bankruptcy exit plan is on firm ground, and that certain aspects protecting bondholders should be upheld.
That won't make a difference to high-yield analysts like Larkin, who said the county is not even on his radar screen.
There are "plenty of other fish in the sea versus this one that already stinks," he said. "The buyers will probably be hedge funds, looking for loan-shark type yields."
County officials unveiled the new refunding plan to rating agency analysts in May when they traveled to New York to provide updates on the county's finances since exiting Chapter 9 bankruptcy in December 2013.
"I am curious as to how short-term the memory of the bond raters will be if they rate this issue," he said. "Without some form of state backing, or the backing of a bond insurance company -- either of which is unlikely here in my opinion -- I think the market's reception to new Jefferson County, Ala. publicly issued bonds should probably be like a cold day in hell."
Donaldson said if the market follows past precedents, the county may face a rough road. It took several years before New York City came to market with a straight general obligation bond, following initial financings by the Municipal Assistance Corp.
He noted that even today financing vehicles like the New York Transitional Finance Authority serve to fund a portion of the city's needs.
Donaldson said he has avoided several Alabama deals as a result of Jefferson County's troubles, and doesn't own any bonds in Birmingham or Jefferson County.
He characterized the bankruptcy of California's Orange County, as "more man-made and less structural" than Jefferson County's.
"Once the county emerged from bankruptcy with new financial management, market access came much easier," Donaldson said.
One investor said the market may give the county the benefit of the doubt, since its crisis was less severe than those currently in the headlines.
"JeffCo is a good test case for a post-Chapter 9 issuance and trading," said David Tawil, president of Maglan Capital.
He said it is "not exactly representative of some of the comprehensive restructurings that we have seen since Detroit, or we will see," he said, referring to Atlantic City, Puerto Rico, and Chicago.
"JeffCo was a one-issue bankruptcy; namely, the sewer system and the related bonds," he said. "The balance sheet has been considerably corrected and should be sound on a go-forward basis."
However, Tawil said he wouldn't be surprised if the initial buyers are limited to hedge funds and high yield funds, and questioned whether traditional municipal investors would even show up.
At the same time, he was concerned about whether the restructuring and a legal appeal of the reorganization will be an "overhang" on the new deal.
"I don't expect a lot of secondary trading because it is a relatively small issuance," he said.
Citi was the lead underwriter on $1.8 billion of sewer refinancing warrants sold in December 2013 as a key element of the county's bankruptcy exit plan, which allowed it to write down $1.4 billion in related sewer debt.
The plan contained safeguards for new bondholders, including what is believed to be a precedent-setting provision requiring that the bankruptcy court continue to oversee promises made by the county to raise sewer rates over the next 40 years to service the debt.
