BRADENTON, Fla. – Settlements with most of the creditors holding Jefferson County, Ala.’s $3.1 billion of defaulted sewer debt should help pave the way for a smoother process toward exiting bankruptcy, according to a restructuring attorney.
On Thursday, federal Judge Thomas Bennett will be asked to halt all pending litigation in the bankruptcy, including a number of adversarial cases brought to decide specific issues.
The county has said that it will file by Sunday a plan outlining how it will adjust its debt, and a detailed disclosure statement explaining the Chapter 9 bankruptcy process and plans for the future.
The delay or “standstill” in legal challenges being sought this week is part of so-called plan support agreements approved earlier this month between the county, JPMorgan, bond insurers, and a group of “ad hoc” warrant holders that collectively own $2.4 billion or 78% of the sewer debt.
The parties have agreed to restructure the majority of the sewer debt and take recoveries on their investments ranging from 31% to 80%, and to vote for the county’s plan of adjustment in coming months.
The Jefferson County Commission on Thursday is also poised to approve a plan support agreement with liquidity banks holding $138 million of sewer warrants. Details will be released after the board votes.
If the liquidity agreement is approved, the county would have deals in place to restructure $2.54 billion of the $3.1 billion in outstanding sewer warrants, and $365 million of non-sewer related debt.
Together the pacts cover $2.903 billion of the county’s $4.1 billion in outstanding debt.
It is the accord on the sewer warrants that makes it viable for the county to exit bankruptcy on its target date of Dec. 20, which would bring Chapter 9 to a close in a little more than two years, despite predictions the process could take more than three years.
“By reaching a tiered settlement, you basically have the largest creditor constituents coming together and agreeing on a compromise, and giving the case a chance of coming out of bankruptcy within two years,” said restructuring attorney Meagan Costello of Goodwin Procter LLP. “That’s the kind of compromise you traditionally see in a Chapter 11 case when it’s time to get a deal done.”
If all goes as planned over the next few months, and a majority of creditors vote to approve the debt adjustment plan, the county may avoid a long, drawn-out, and expensive contested confirmation of the plan of adjustment, said Costello, whose firm is not involved in the case.
In order for a plan to be confirmed by the judge, the county must have approval from half of the creditors holding two-thirds of the dollar amount of claims in each class.
“I think there’s no doubt the sewer obligations are the largest creditors in the case,” Costello said. “Having the largest creditors on board gives [the county’s case] momentum.”
Jefferson County has agreed to refinance about $1.835 billion of sewer warrants immediately after emerging from bankruptcy. The proceeds and other sources of cash will be paid to creditors based on the plan support agreements, which will allow investors to benefit from losses JPMorgan has agreed to take.
JPMorgan, which has settled securities fraud charges with the Securities and Exchange Commission over its part in Jefferson County’s failed sewer deals, will take the largest haircut and recover $376 million of its $1.2 billion in sewer warrants.
The bank will also waive more than $25 million of other sewer-related claims, and its claims to bond insurance.
Financial Guaranty Insurance Co., Syncora Guarantee, Inc., and Assured Guaranty Municipal Corp., which wrap the sewer debt, are currently holding $342.03 million of sewer warrants due to various claims. They will receive a total of $165 million from refunding proceeds and other cash.
The group of ad hoc warrant holders that purchased $872 million of sewer warrants from banks, most after the county filed for bankruptcy, will receive 80 cents on the dollar but must waive their claims to insurance. They will also provide a backstop to the county’s refinancing later this year, for which they will be compensated. Those terms have not been disclosed.
The ad hoc warrant holders’ plan support agreement is a facility that will allow the county to bring new debt to market, said Laurence Gottlieb, chairman and chief executive officer Fundamental Advisors LP, who asset management firm is among the ad hoc sewer warrant group.
For his firm, Gottlieb said, participation in negotiations was about more than eliciting a return on its investments.
“We engaged in a productive dialogue where the citizens of Jefferson County will retain a critical core asset … and that helps the county emerge from bankruptcy,” he said. “It’s a positive result and I think a hallmark of the deal is that residents of the community have the ability to refinance an asset that is critical to them.
“This will let Jefferson County get back into the business of attracting new businesses and growing and developing existing businesses.”
Though Gottlieb could not confirm the total amount of Fundamental’s holdings, county documents show that Fundamental Partners owns at least $35 million of sewer debt. It is not clear if the firm is related to other funds.
Many have described the ad hoc group as “hedge funds,” including the county’s prime bankruptcy attorney, Kenneth Klee. Gottlieb said Fundamental specializes in special situations and distressed situations through various investments and recovery strategies.
“Creditors in the municipal marketplace must behave in a manner calibrated to be a participant and a solution provider and a collaborative force in assisting in the recoveries of municipalities,” Gottlieb said. “We have spent our careers at the asset level working to find creative solutions to keep core services in place. That’s how we invest.”
If the county’s plan of adjustment is approved, investors who hold the county’s sewer warrants and did not sign a plan support agreement will recover between 65 cents and 80 cents on the dollar. They will get the higher amount if they waive the right to collect on insurance.
On the current schedule approved by the county and sewer system creditors, it is expected that the judge will approve the disclosure statement by Aug. 30.
After that the plan and disclosure statement will be made available to all creditors who will vote on whether to accept the plan of adjustment.
By Nov. 25, Jefferson County expects to have the plan confirmed and the new sewer warrants to be validated by a state court.
By Dec. 20, the county expects to receive the final court order allowing it to exit bankruptcy, which will be followed by the sale of the new warrants.
Jefferson County filed for bankruptcy Nov. 9, 2011 after several years of negotiating with creditors over $3.1 billion of warrants sold to repair the region’s sewer system under federal court order.
Most of the warrants were sold as variable- and auction-rate securities that failed in the credit crisis, with most of the debt incurring high penalty interest rates.
Corruption complicated the soured deals, which were orchestrated by former county commissioners Larry Langford. He is in jail serving 15 years on pay-to-play charges.
More than 20 contractors, county employees, elected officials and those participating in the financings have been indicted or pled guilty to crimes.
