Bondholders of Jefferson County, Alabama, who last month won a court ruling shielding them from some payment reductions, face a new battle in the biggest U.S. municipal bankruptcy after starting talks with county officials.

The trustee for bondholders asked the judge overseeing the case for access to details about the insolvent sewer system, which owes creditors about $3.1 billion. The details will help bondholders determine the value of the system, which serves as their collateral, lawyers for the trustee, Bank of New York Mellon Corp., said yesterday in court papers.

The bondholders are preparing for a court battle over the value of the system, while not agreeing that such a discussion is relevant.

“The trustee disputes that a valuation of the system or the net system revenues is appropriate or relevant in connection with the county’s obligations,” the trustee said.

Jefferson County is deciding how much to raise sewer rates and whether the value of the system has fallen enough to justify forcing bondholders to take less than they are owed.

The county and bondholders started a new round of negotiations last week that will focus partly on the value of the system, said Ken Klee, the county’s bankruptcy attorney, in an e-mail today.


Value of Assets

Should the county decide to push for a reduction of the sewer bond debt, the judge would consider the present value of the bondholders’ collateral, which is made up mostly of system assets.

The county contends that under Chapter 9 of the U.S. Bankruptcy Code, Judge Thomas B. Bennett in Birmingham, Alabama, has the power to reduce the amount of the bond debt to be in line with the value of the bondholders collateral. Bondholders disagree.

“The county commission has not prejudged rates which will drive the value of the collateral,” Klee said. “The rates will determine the value of the collateral. Although preliminary testimony suggests the value of the system is less than the $3.1 billion remaining on the sewer debt, the commission has not formed a value judgment.”

The commission may decide whether to pursue a cut to the sewer debt in October, Klee said.

Last month, Bennett ruled that Jefferson County can’t reduce payments to bondholders so it can spend more on its aging sewage system, or pay legal fees. The ruling was a victory for bondholders, shielding them from reduced payments while Jefferson County remains in bankruptcy. The county asked the judge to reconsider part of his ruling.

The case is In re Jefferson County, 11-05736-9, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).

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