BRADENTON, Fla. — Jefferson County, Ala., is readying a plan that could help guide it out of the country's biggest municipal bankruptcy.

"I would anticipate that the county will file a plan of adjustment within the next 90 days, which would be the first part of June," said County Commission president David Carrington.

Negotiations with creditors are "proceeding productively," Carrington said in email responses to The Bond Buyer.

Citing those ongoing "active" negotiations, he would not comment on how much of a haircut will be sought on the county's most onerous debt — $3.1 billion of defaulted sewer warrants.

Jefferson County filed for bankruptcy in November 2011 with a total of $4.2 billion of debt. The complex case is costing more than $1 million a month in legal fees.

Filing a plan of adjustment does not mean that it can or will be approved, according to John Whitlock, a partner at Edwards Wildman Palmer LLP who is not involved in the Jefferson County case.

"Announcing a deadline to file a plan is a common negotiating tactic to push along the plan negotiation process," said Whitlock. "A debtor might even file a plan that has not been fully agreed among key creditor groups as a tactic to set out the debtor's position and put pressure on the negotiators to move forward."

Jefferson County officials and attorneys have been in negotiation since early 2008 when the debt attached to the overleveraged sewer system, mostly in auction- and variable-rate mode, collapsed after liquidity in the market froze and then bond insurers' ratings plummeted.

The county came close to agreement on a restructuring deal in 2011, but the unrelated loss of an occupational tax providing significant revenue for the county general fund after an adverse court ruling propelled the county into bankruptcy when state officials failed to provide assistance.

Whitlock said that if a proposed plan of adjustment meets with significant creditor resistance, a debtor may attempt to move ahead believing it can satisfy the conditions for confirmation with the support of some creditors, while seeking to cram down concessions on other dissenters.

"That approach is certainly more risky than continuing the negotiations, even after a plan is filed," Whitlock said. "If the plan has not been sent out to the creditors for approval, the debtor can always modify a filed plan to incorporate agreements it reaches with creditors in order to make it more palatable and easier to confirm."

So far, the county has only reached consensual agreements on a small amount of outstanding warrants with two creditors.

Federal judge Thomas Bennett approved the first negotiated settlement in December with bond insurer Ambac Assurance Corp., which agreed to reduce the county's annual payment on $82.5 million of lease revenue warrants by extending maturities 11 years. Investors and Ambac will eventually be made whole.

In February, the county reached agreement with Depfa Bank PLC to reduce the interest rate on $162.5 million of variable-rate school warrants saving the county about $1 million a year. Depfa agreed to vote in favor of the county's plan to exit bankruptcy in return for early redemption of the warrants, which the bank owns as standby purchase provider.

Creditors that reach agreements, with or without concessions, would typically support a plan that incorporated their settlements, Whitlock said.

Meanwhile, there are numerous appeals and adversarial cases associated with Jefferson County's bankruptcy, including the county's own appeal of the judge's ruling that allowed investors with warrants secured by special revenues to be paid while the Chapter 9 case is pending.

Details of those cases are included in the county's 2011 audit, which was quietly posted on the commission's website last month.

If creditors reach agreement on the plan of adjustment, the pending appeals could become moot, according to Whitlock.

"That is a very common result when creditors have fought over a number of issues and then agreed on a settlement," he said.

Creditors could also resist all attempts to confirm a plan until some of the appeals have been decided.

"Contested plans can be difficult to confirm, and we have so little precedent in Chapter 9 that it is not possible to predict how the court would handle a contested plan that included cramming down one or more dissenting classes," said Whitlock. "It could certainly be a major litigation event if it proceeded."

On Thursday, hearings resume in Birmingham federal court over the new system the county has proposed for determining sewer rates.

The county believes that system will increase the average residential bill less than $2 a month, while non-residential rate revenue will increase by about 4.2%. In total, the new structure is expected to generate 5.9% more revenue.

Since the county has not increased sewer rates in at least four years, the new rate structure is being challenged by creditors of the sewer system because they believe it will not support payment of the outstanding debt.

They have asked the judge for relief that would enable them to go to state court and seek the appointment of a receiver to oversee the sewer system once again.

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