Moody’s Investors Service last week affirmed its B3 rating on bankrupt Jefferson County, Ala.’s $747 million of outstanding limited-obligation school warrants.

The outlook remains negative reflecting “the possibility that ultimate recovery levels for warrant holders, once bankruptcy proceedings conclude, could fall below 95%,” Moody’s analyst Christopher Coviello said after reviewing a recent settlement with Depfa Bank PLC.

Jefferson County filed the country’s largest municipal bankruptcy in November 2011 with $4.2 billion of debt.

The county has entered several agreements restructuring some debt, including $162.5 million of variable-rate school warrants owned by Depfa as a standby purchase provider.

“Moody’s believes the county’s recent agreement with Depfa Bank PLC to lower interest paid on the Series 2005B warrants will not materially change the expected loss to holders,” Coviello said. “However, it is important to note that while the limited-obligation school warrants are secured by a dedicated 1% sales and use tax this does not fully insulate them from the broader risks associated with Jefferson County’s financial situation or the bankruptcy case.”

On Feb. 11, the county entered an agreement with Depfa that lowers the bank rate to prime plus 2.25% from prime plus 3% saving the county between $1 million and $1.2 million in interest per year, Moody’s said.

Depfa also agreed to vote in favor of the county’s plan to exit bankruptcy, and in return the county began making mandatory early redemptions of on bank’s warrants.

“The agreement with Depfa is a distressed exchange that Moody’s views as a default, but the loss compared to promised principal and interest is consistent with the current B3 rating,” said Coviello.

The school warrants are outstanding as $479.4 million of fixed-rate 2004A warrants, $105.5 million of 2005A auction-rate warrants and $162.4 million of 2005B variable-rate warrants.

While the county has not released an audit since 2010, Moody’s said unaudited school tax revenues have shown improvement over the last several years after declining in fiscal 2008 and 2009.

“Although not back to pre-recession highs, it is our expectation that sales tax receipts will continue to grow over the near term as well as provide the necessary revenues needed to continue making debt service payments on all of the outstanding limited obligation school warrants,” Coviello said.

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