JeffCo and Depfa Reach Deal on Defaulted School Warrants

BRADENTON, Fla. — Bankrupt Jefferson County, Ala., has notified the bond market that it intends to enter a settlement with Depfa Bank PLC to reduce the interest rate on $162.5 million of variable-rate school warrants.

The concession doesn't bode well for other school warrant holders who believed their investments were secure because the warrants are backed by a dedicated special sales tax, according to Municipal Market Advisors managing director Matt Fabian.

Depfa, which is no longer doing municipal bond business, acquired Jefferson County's 2005B limited obligation school warrants due in 2027 as the standby purchase provider.

In the settlement that was approved Feb. 11, the bank agreed to cut its penalty interest rate on the warrants to the bank rate plus 2.25% from the bank rate plus 3%, according to a material event notice filed by the county on Friday.

The county agreed to redeem Depfa's school warrants early with excess collections of the dedicated sales tax, in addition to releasing $21.3 million in excess revenues that the county had been withholding.

Early redemption was obligated under terms of the standby warrant purchase agreement, which had been required since fiscal 2008, when Depfa declared the warrants in default, according to the county's most recent audit for fiscal 2010.

In return for the concessions, the bank agreed to support the county's plan of adjustment for exiting Chapter 9, and to waive all of its defaults, according to the market notice.

Depfa spokesman Oliver Gruss said the bank declined to comment citing policies against discussing clients and legal proceedings.

County officials have said publicly that the settlement would save about $1 million a year, which would be applied to the outstanding principal on the school warrants, according to commissioner Jimmie Stephens, who heads the board's finance committee and is negotiating with creditors along with David Carrington, the commission president.

The county's resolution approving the deal said it is likely to enhance the county's ability to formulate and achieve a Chapter 9 plan of adjustment on terms that will benefit the county.

The settlement "shows a willingness to reach a solution and a compromise by both parties," Stephens told The Bond Buyer Tuesday. "It also creates a consenting impaired class."

Though it appears that Depfa will be made whole on its principal and most of its original interest, Fabian said the settlement is not a good precedent for similar creditors because a secured sales tax creditor is agreeing to receive less than 100% of what is owed.

"Depfa, like the other holders of the school warrants, has an exceptionally strong position with respect to the receipt of funds," Fabian said. "It looks like they've agreed to a modest haircut in interest in exchange for the release of funds for otherwise scheduled mandatory redemptions."

Jefferson County issued $1.05 billion of school warrants and gave the proceeds to 11 local school boards for capital improvement projects, and their debt retirement. The warrants are secured by the gross proceeds of a special education sales tax.

In addition to the bank warrants held by Depfa, another $534 million of fixed-rate 2004A school warrants and $105.5 million of 2005A school warrants in auction-rate mode remain outstanding.

Fabian said it is "very hard" to see how the agreement with Depfa sets any precedent for other settlements. Other secured creditors, such as those holding sewer warrants, are in a "vastly different position."

The county filed the largest municipal bankruptcy in November 2011 with $3.1 billion in sewer debt related to an over-leveraged sewer system. Most of the sewer debt is in variable- and auction-rate mode.

The school warrants are rated B3 by Moody's Investors Service and B by Standard & Poor's.

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