BRADENTON, Fla. — Jefferson County, Ala., said Monday that the Internal Revenue Service is examining $82.5 million of outstanding lease revenue warrants issued in 2006.
The 20-year warrants were sold by the Jefferson County Public Building Authority to build a courthouse and jail in the city of Bessemer.
The limited-obligation debt was secured by a pledge of revenues derived from leasing the facilities with the county making annual appropriations for lease payments.
Jefferson County, which filed the nation’s biggest municipal bankruptcy in November, is negotiating with the insurer, Ambac Assurance Corp., to restructure the lease warrant debt.
The county has also filed a motion to reject the lease, which is on hold through Dec. 28 while negotiations with the insurer continue.
According to Jefferson County’s market notice Monday, a letter from the IRS said that the 2006 warrants have been selected “for a routine examination” that is in progress.
The notice did not say when the IRS letter was received.
“If the service determines that federal tax laws or regulations applicable to the Series 2006 warrants have been violated, interest on the said warrants could be declared taxable and a tax liability could be assessed against the holders of all or some portion of the said warrants,” the Alabama county said.
It is not clear what impact, if any, the IRS review would have on negotiations to restructure the debt. Jefferson County already defaulted on the lease-revenue warrants in April when funds from the reserve were used to supplement the debt-service payment.
In August, the County Commission voted to reject the lease while preparing the 2013 budget.
The county filed a motion with the bankruptcy court to begin the process of rejecting the lease, saying that it did not have enough money to pay for the lease and essential government services.
Subsequently, the county asked the court to delay taking action on the lease rejection because it was negotiating “in good faith” with Ambac.
The Jefferson County Commission late last month approved a term sheet outlining a proposed agreement with Ambac that would reduce annual debt-service payments to $4 million and $5 million from $8.3 million.
The final maturities would be extended to 2037 from 2026.
If the deal is eventually approved, warrant holders would see no change in their payments or maturities under the restructuring, according to Ambac.
If the annual payments from the county are insufficient to pay debt service, Ambac will make up the difference under the terms of its policy, the insurer has said.
Ambac will receive payments it makes to supplement debt service by virtue of the extended maturity schedule.
Both warrant holders and Ambac would be made whole under the terms of the pending agreement.
The deal still must be approved by the bankruptcy court judge.
Over the last six months, some of the bonds have continued to trade highly in early maturities from 2013 to 2018, while longer bonds were cheaper.
Some $4.35 million of serial bonds maturing in 2013 were trading between 90 cents and 98 cents on the dollar with yields as high as 12.6%, while $6 million of serial bonds maturing in 2019 were trading from 74 cents to 86 cents on the dollar with yields up to 11.9%.
Some $29.4 million of term bonds maturing in 2026 traded between 64 cents and 78 cents on the dollar, yielding up to 10%.
