NEW YORK - Moody's Investors Service has downgraded to Caa3 from Caa1 the rating on Jefferson County, Ala.'s $200.5 million in outstanding general obligation (GO) debt and to Ca from Caa2 the rating on $83.6 million in outstanding lease revenue warrants issued through the Jefferson County Public Building Authority; both ratings remain on under review for downgrade.

Moody's downgrade of the general obligation rating reflects the expected default on the county's fixed rate GO warrant debt service payment due April 1. Although the county's bankruptcy filing already created an automatic stay affecting GO bondholders, the county filed a resolution dated March 28, 2012 that directs officials to skip the April 1 principal and interest payment on outstanding Series 2001B, 2003A and 2004A GO warrants, constituting an event of default under the trust Indenture.

The county has been in default on its variable rate demand GO bank warrants (Series 2001B) held by liquidity providers since 2008; however, this is the first default on county fixed rate GO warrants. The GO rating remains under review for downgrade.

The resolution indicated that the county decided to skip the upcoming debt service payment in order to preserve an already narrow cash position, indicating that notwithstanding the automatic stay related to the bankruptcy filing, the county lacks sufficient funds to pay GO bondholders. The resolution indicates the county's cash position would be further stressed if they made the $15 million payment on April 1, the first GO debt service due since the county filed its petition for Chapter 9 bankruptcy protection in November 2011.

Due to the state supreme court's overturning of the county's occupational and business license tax in March 2011, the county has struggled to raise revenues sufficient to pay for essential county services. Press accounts state that management believes if the April 1 general obligation debt service payment was made, the county general fund would end fiscal 2012 with a very narrow $7.0 million cash position, forcing sizeable cuts to essential services.

It is unclear at this time whether or not the state legislature will authorize the county to levy a sustainable long-term revenue source sufficient to pay GO debt service payments and fund essential county services. Given the continued lack of resolution of the county's fiscal crisis, the risk of GO default is higher now than before the resolution was adopted. For this reason, Moody's said it has downgraded the GO rating to Caa3. The Caa3 rating indicates an expected recovery on defaulted bonds in the range of 65% to 80%.

The Ca rating on the lease revenue bonds reflects the nature of the security, which is subject to annual budget and appropriation of the county and therefore is weaker than the GO rating. Additionally, according to press sources, the county's April 1 lease revenue debt service payment of $6.38 million is expected to be paid from the bond reserve fund. The Ca rating indicates an expected recovery on defaulted bonds in the range of 35% to 65%.

On March, 4, 2012, the Federal Bankruptcy Court approved Jefferson County's petition for federal bankruptcy protection under Chapter 9 of the US Bankruptcy Code. Authorization of the petition allows the county to continue its efforts to develop a plan to restructure over $4.23 billion in debt. Moody's will continue to monitor the county's progress in developing its bankruptcy plan, including any progress made with the state legislature to provide a long-term revenue source that is sufficient to fund essential county services and pay GO debt service going forward.

Moody's continues to review the following ratings on Jefferson County for possible downgrade: the Caa3 rating on $3.14 billion in sewer revenue debt; the B3 rating on $814.08 million in limited obligation school bonds; and the B3 rating on $32.92 million in special tax bonds issued by the Birmingham-Jefferson Civic Center Authority and secured by various county-wide excise taxes and other county revenues.

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