JeffCo Debt Deal Could Leave Some Market Questions Unanswered
BRADENTON, Fla. – Jefferson County, Ala., announced a deal Tuesday intended to help it leap a major hurdle toward exiting the country’s largest municipal bankruptcy, but some early details are raising eyebrows about its long-term effects on the municipal bond market.
The deal with 78% of the county’s creditors holding sewer system debt hinges on the county emerging from bankruptcy in December and quickly going to the bond market to issue $1.835 billion of new sewer warrants that may be sold unenhanced to high-yield investors.
County officials, after meeting with financial advisors and bankers, have been told that such a deal is possible in today’s market.
But whether a financing even reaches the market depends on the complex process that remains ahead in the Chapter 9 bankruptcy case, and resolution of outstanding debt issues with other creditors.
A plan of adjustment and related documents are expected to be filed within a month, according to attorneys representing the county.
The plan formally addressing all the classes of creditors, and a disclosure statement, must be approved by the bankruptcy court after notice to the creditors and a hearing, said attorney John Whitlock with Edwards Wildman Palmer LLP. Creditors will then vote on the plan.
“Depending on how the classes of creditors are defined will determine whether there are in fact any dissenting classes to be crammed down,” said Whitlock, who is not involved in the case. “With the support of the largest creditors, it appears that the county may have mustered enough support for its ultimate plan that it can reasonably expect to get sufficient votes from impaired classes so that the plan can be approved.”
Jefferson County has about $4.1 billion of outstanding debt.
On the county’s largest debt: $3.1 billion of sewer warrants the impact for most investors will be muted because JPMorgan agreed to take a larger share of the haircut.
Two former JPMorgan bankers face SEC charges of making $8 million in undisclosed payments to close friends of certain Jefferson County commissioners and broker-dealers to ensure that JPMorgan would be selected to underwrite Jefferson County sewer warrant offerings, and that the firm’s affiliated bank be chosen as the main swap counterparty.
JPMorgan settled SEC securities charges by agreeing to pay $75 million in penalties and to forfeit more than $647 million of claimed swap termination fees without admitting or denying the charges.
With JPMorgan agreeing to redistribute all but about 20% of its $1.218 billion holdings in the bankruptcy settlement, other sewer system creditors on average could recover about 80 cents on the dollar.
Those creditors include the “ad hoc” group of hedge funds, which were referred to as “a series of New York high-yield investors” in a court hearing last month by Kenneth Klee, one of Jefferson County’s lead attorneys.
Collectively, the funds hold about $900 million of sewer system debt.
The impact of the hedge funds in future bankruptcy negotiations is something to watch, according to Richard Ciccarone, chief research officer and managing director at McDonnell Investment Management.
“I think the gravity of this situation and the details now being offered are significant, and are going to require further attention on perhaps how they might influence investment decisions on distressed governmental credits in the future,” Ciccarone said, adding that such hedge funds typically participate in distressed private activity bond cases.
Another significant precedent in Jefferson County’s case is that the creditors, including hedge funds, have agreed to recovery of less than 100% of bonds that are secured by a special revenue pledge, in this case sewer system revenues.
The special revenue pledge is a protected class of security, Ciccarone said.
In the county’s bankruptcy case, Judge Thomas Bennett ruled that the sewer system revenues are a protected class and that enabled warrant holders to be paid while the case proceeded.
Jefferson County filed an appeal of that ruling, which is pending before the 11th Circuit Court of Appeals along with an appeal by creditors of Bennett’s ruling stripping a state-court appointed receiver from overseeing the county’s sewer system.
Oral arguments are scheduled to be heard by the appellate court July 24, though court-ordered mediation is slated to take place between the county and creditors July 10-11.
The appellate court could be asked to postpone oral arguments if mediation proves successful.
If the county’s bankruptcy is resolved before the appellate court acts on the special revenue protection and receivership, legal questions about standing of both issues in Chapter 9 bankruptcy will not be answered.
“Despite the special revenue pledge showing there is a protected class of security, in bankruptcy if you don’t have the cash, you don’t have the cash,” Ciccarone said. “The question is about the ability and willingness of Jefferson County to pay.”
The ability to pay debt has underpinned the county’s bankruptcy case from the start. The bankruptcy filing was precipitated by the loss through a court decision of a state-authorized occupational tax that supported the county’s general governmental activities, and a dwindling general fund.
Despite the large size of the debt, the overleveraged sewer system was a secondary factor behind the Chapter 9 filing.
The Alabama Legislature has refused on a number of occasions to authorize a new occupational tax or any other source of funding to help Jefferson County shore up operations. The county, which does not have home rule, cannot enact taxes without the approval of lawmakers.
One positive aspect of this week’s landmark agreements with sewer system creditors, and the proposed refinancing of the county’s sewer warrants, is that neither requires action by the Alabama Legislature, a market observer said.
The so-called “plan support agreements” have been signed by JPMorgan, the “ad hoc” group of hedge funds, and bond insurers Assured Guaranty Municipal Corp., Financial Guaranty Insurance Co., and Syncora Guarantee Inc.
Collectively, their sewer warrant holdings represent about $2.4 billion, or 78%, of the county’s $3.1 billion of outstanding sewer debt.
If approved by the court, JPMorgan would recover approximately 31% of its $1.218 billion stake.
JPMorgan declined to comment on the agreement.
“The conditional Jefferson County agreement provides a framework for resolving the county’s sewer indebtedness,” Assured Guaranty, one of several insurers of the county’s sewer debt, said in a statement.
“As of March 31, 2013, Assured Guaranty’s direct and assumed net exposure to the sewer warrants was $464 million,” the statement said. “If the conditional agreement is implemented, Assured Guaranty’s losses are expected to be within already established reserves.”
In return for the plan support agreements, the County Commission pledged to institute future sewer rate increases of 7.41% in each of the first four years after the plan’s approval, and up to 3.49% each year thereafter as long as the new sewer warrants remain outstanding.
The agreements also include a “standstill” arrangement, which suspends all litigation between the parties though it is not clear when that goes into effect.
Late Tuesday, Jefferson County posted a detailed account of the plan support agreements on EMMA with all outstanding sewer system warrant cusips.