WASHINGTON — As it teeters on the brink of bankruptcy, Jefferson County, Ala., is taking the unprecedented step of asking the Securities and Exchange Commission to play a role in restructuring its $3.2 billion sewer debt portfolio.
So-called fair fund legislation authorizes the SEC to provide such funds to investors who were victimized in securities fraud cases.
Much of the 27-page letter and memo consisted of a lengthy background memo on the history of the county’s financial mess, but also proposed publicly for the first time that Jefferson’s creditors be required to purchase the refinanced sewer debt at an interest rate of 3.5%, which would be paid back over 40 years.
JPMorgan played a key role in financings, which converted $3 billion of the county’s fixed-rate debt into variable rate debt. But the short-term debt’s interest rates have skyrocketed during the financial crisis.
“In light of the enormous harm and damage to Jefferson County and its citizens from any violation of the securities laws determined by the SEC, a simple monetary settlement is not likely to fix the underlying problem,” Collins wrote.
Collins said the county believes it is more important for the SEC to consider Jefferson County’s proposal to restructure the sewer debt as part of any settlement with creditors.
“We urge the SEC to consider how any party found to have violated the securities laws may support the county’s efforts to restructure and repay the sewer debt over time,” she said.
Collins noted the county’s creditors want the sewer debt refinanced through a new public offering “that would pay them off and terminate their existing credit enhancement obligations. The county simply cannot meet that demand.”
“The county has no realistic access to the public debt market for a refinancing of this debt,” she said while recounting numerous political and criminal problems regarding the sewer debt, as well as difficulties created by downgraded bond insurers, and the downfall to junk status of the county’s own credit ratings, among others.
Turning to the county’s proposal, she said: “The interest rate is admittedly below the current market for long-term debt with an 'A’ rating (the rating the county had earned for its sewer debt before the crisis), but the rate is higher than short-term investment rates available to the creditors .... The county believes this is fair and appropriate under the circumstances. It is also all that the county can afford.”
In return for the creditors repurchasing the debt, Jefferson County would support once again seeking the Legislature’s authority to redirect excess local sales tax revenues to the refinanced sewer debt. Currently, those revenues are dedicated to educational bond debt service.
In addition to the sales tax revenue, the county would require that “fixed sewer revenues” be dedicated to the refinanced debt to limit increases in sewer rates. The county would dedicate to repayment of the debt sewer revenue of $115 million a year for the first five years, and $116.5 million a year for years six through 10, with similar increases for the remaining 30 years.
“This will wipe the slate clean on the existing debt, which will be paid in full,” said Collins. “To the extent that completely innocent institutional or individual investors hold existing warrants, they will be paid in full. Only the existing creditors will purchase the refinancing debt.”
Collins noted that interest rate swaps have been terminated, and that under its proposal the county would make no further payments. Officials previously estimated that the swap termination costs totaled $748 million.
If the restructuring plan requiring creditors to purchase the refinanced sewer debt is accepted, Collins said commissioners would agree to create an oversight board to review the sewer system’s operations and capital plans. The commission would still set sewer rates, employ personnel, and exercise the power and responsibilities with respect to the system.
“The oversight board should give the public, the Legislature and the creditors greater confidence that the sewer system is being administered properly,” Collins said. “It will also provide additional expertise for the county to rely on in its decision making.”
Collins said the plan is the “best option — the best the county can offer.”
The proposal outlined in Collins’ letter has not been discussed by commissioners or vetted publicly, sources said. The letter was sent to Gov. Bob Riley. The governor’s press secretary, Todd Stacy, said yesterday that Riley is not commenting on the letter at this time. The Jefferson County Commission last fall had asked Riley to facilitate negotiations with creditors.
SEC officials yesterday declined to comment on the Collins’ letter.
Several securities lawyers were dismissive about Collins’ request for the disbursement of fair funds. Tom Loo, a securities lawyer and co-managing shareholder at Greenberg Traurig LLP, said he thought it would be “highly unusual” for the SEC to disburse such funds to the county.
“Usually those types of settlements go back to the victims that bought the bonds as opposed to others,” Loo said. “I don’t know how this bond offering made [the county] a victim other than it may have difficulty selling anything again.”
Another attorney who asked not to be named because he has ties to Jefferson County said: “It’s a Hail Mary, but I doubt that pass will be completed.”
