"I'm thoroughly confused with S&P's decision," said County Commission President David Carrington.

BRADENTON, Fla. — When Standard & Poor's downgraded all of Jefferson County, Ala.'s sales-tax backed school warrants, some people said the action was misleading and others were confused.

S&P issued a brief statement Dec. 11 stating that it lowered the ratings to D, the lowest rung on the rating scale, indicating payment default, from B on the county's Series 2004A, 2005A-1, 2005A-2, 2005A-3, 2005A-4, and 2005B warrants.

"We believe there was a distressed exchange between the county and its creditors for these warrants and that the county did not honor its original agreement to warrant holders," said analyst Brian Marshall. "In our view, the distressed exchange occurred when the county emerged from bankruptcy on Dec. 3, 2013. At that time, the…warrants became governed by a materially different indenture with reduced payments to bondholders."

S&P issued a slightly longer statement on Thursday noting that the 2005B variable-rate demand warrants were held by Depfa Bank PLC after failed remarketing, and that all school warrants were issued in parity under the same indenture. S&P said it no longer rated the warrants when the county exited bankruptcy.

One investor called The Bond Buyer concerned about the school warrants he held after learning about the deep downgrade.

"I'm thoroughly confused with S&P's decision," said County Commission President David Carrington in an email. "There were no material changes to the warrants in the plan of adjustment."

The downgrade is "a bit misleading and paints a picture of the situation being dire when it is in fact not," said Chris Doucet, chief executive officer of Birmingham-based Doucet Asset Management, which owns some school warrants.

"My understanding is the downgrade occurred because of an agreement by and between the county and Depfa Bank," Doucet said, adding that his comments reflect his opinions and not those of his firm's broker-dealer, which is Institutional Securities Corp.

When Jefferson County filed for bankruptcy in November 2011, the outstanding school warrants were $534.4 million of 2004A fixed rate debt, $105.5 million of 2005A auction-rate securities, and $174.17 million of 2005B variable-rate demand warrants.

The county reportedly made payments on the school warrants while bankruptcy proceeded but negotiated a restructuring agreement with Depfa Bank to reduce the interest rate on the 2005B warrants acquired as standby purchase provider. Depfa, which is no longer doing municipal bond business, agreed to cut its default interest rate to prime plus 2.25% from prime plus 3% when the county exited bankruptcy. The county agreed to redeem some or all of Depfa's school warrants early with excess sales tax collections.

"Because S&P is in the business of rating issuers, as opposed to specific subseries, the downgrade was applied to every series of the school bonds, including the fixed rate bonds and those not held by Depfa bank," said Doucet, who added that is why S&P suggested the "warrants became governed by a materially different indenture with reduced payments to bondholders."

With the exception of the county's agreement with Depfa, he said "nothing significant" occurred in the bankruptcy exit plan to change the payments or indenture of the school warrants.

"The rating clearly was not based on the credit paying ability of these bonds nor did S&P ever claim it was," Doucet said. "In an interesting twist, Moody's Rating Service put the bonds on positive credit watch on Nov. 27, 2013 indicating the bonds would probably be upgraded."

Moody's currently assigns a B3 rating to the school warrants.

Current reports for the school warrants, which are backed by a dedicated sales tax, show that "fund balances are improving and the financials are quite healthy," according to Doucet. "If the financials continue to remain this healthy, it is hard to believe the rating services would not ultimately upgrade these back to its pre-sewer crisis rating."

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