BRADENTON, Fla. The triple-B ratings assigned to Jefferson County, Ala.’s $1.7 billion sewer warrant deal should be considered “borderline non-investment grade,” Standard & Poor’s analyst James Breeding explained in a webcast Thursday.
S&P gave a preliminary BBB rating to $500 million of senior sewer warrants and a BBB-minus rating to $1.2 billion of subordinate warrants on Nov. 6, raising questions by some market experts about how the county qualified for an investment-grade score.
Jefferson County has been in financial crisis since its $3.2 billion of variable- and auction-rate sewer warrants, and related swaps, collapsed in early 2008 during the market crash and subsequent decline of bond insurer ratings. The county has been in bankruptcy since November 2011.
The triple-B ratings reflect that there are clearly significant ongoing challenges that the county must address, said Breeding, who added that they are forward-looking and not meant to be punitive or a reward for exiting bankruptcy.
A series of events and actions helped Jefferson County obtain higher than anticipated ratings, including adoption of a sewer rate structure for the life of the warrants to be confirmed by the bankruptcy court, hiring a professional manager to run day-to-day operations, adopting fiscal policies, obtaining professional financial projections, and adequate debt service coverage, according to Breeding.
The metrics underpinning the debt allow the county to cash-fund capital expenses, operations and maintenance for 10 years while providing time to address additional revenue needs after that. Over the 40-year-life of the debt, 75% of capital expenditures are cash funded. “There are a lot of higher-rated systems that can’t say that,” Breeding said.
Considering the combination of ability and willingness to pay along with conservative financial projections “provided just that sufficient comfort to get to the investment-grade level,” he said.
Standard & Poor’s ratings are in contrast to Fitch Ratings, which assigned speculative-grade BB-plus and BB ratings to the new warrants.
Moody’s Investors Service, which was not asked to rate the deal, issued a special report saying the new debt should be rated in the B or Ba range.
Breeding said the S&P ratings could be lowered if county commissioners’ actions are not consistent with the adopted rates and policies, and if projections, revenues, and expenditures fail to materialize.
The preliminary rating designation will be removed once Jefferson County emerges from bankruptcy with a confirmed plan of adjustment and exit financing. The county anticipates its Chapter 9 case will be final by the end of the year.
If the confirmation plan and financing are unsuccessful, S&P said its ratings will be nullified.