BRADENTON, Fla. - Jefferson County, Ala., commissioners yesterday approved forebearance agreements with liquidity providers, bond insurers, and swap counterparties deferring the first payment owed on the highly leveraged sewer system's standby bond purchase agreements, which are under an accelerated amortization schedule because of bond insurer downgrades.

The agreements delay a $53 million payment due today, while the county will make a $4.2 million interest payment.

"Unless extended by agreement of the parties, the forbearance period terminates April 15, 2008," said Patrick Darby, a partner in the Birmingham office of Bradley Arant Rose & White LLP, one of the law firms representing Jefferson County. "All parties reserve all rights, claims and defenses."

Insurer downgrades have led to failed remarketings of the county's $847 million of variable-rate demand sewer debt, the payment for which is now owed to the banks providing liquidity. The county also had failed auctions on some of its $2.2 billion of auction-rate securities resulting in higher interest rates.

The increase in interest rates coupled with defaults on liquidity facilities and swap agreements have led Moody's Investors Service and Standard & Poor's to downgrade the $3.2 billion of sewer debt far below junk status, and both agencies have also downgraded the county's other credits because of the possibility that the county may file for bankruptcy.

Moody's last week dropped Jefferson County's sewer warrants to Caa3 from B3 in response to the continuing financial crisis. On March 6, Standard & Poor's slashed the county's sewer debt rating to CCC from B.

The county's prolonged financial crisis could impact state and local governments.

Financial Security Assurance Inc. told a local publication last week that it would temporarily suspend writing bond insurance in the state until Jefferson County resolves its difficulties. FSA insures $352 million of Jefferson County's sewer debt.

"We are in discussion with the state of Alabama and Jefferson County and have no further comment," the insurer said when asked if FSA intended to continue to provide insurance in Alabama.

Jefferson County Commission president Bettye Fine Collinsacknowledged in a March 25 letter that failure to resolve the sewer system crisis would "have a negative effect on the county, the surrounding municipalities, and the entire state of Alabama."

Collins said the county has not completed work on its proposed resolution, but officials hope to get legislative and bondholder approval to apply excess sales tax revenues toward some of the sewer debt.

"We are negotiating with those who have a vested interested in and share responsibility for the present crisis, including the financial institutions on Wall Street who structured the sewer system debt and who now own or stand behind an enormous amount of the bonds," Collins wrote. "They have a vested interest because they stand to lose a great deal of money if the negotiation fails. The county has reserved all rights and claims it may have against Wall Street and others who sold bad financial products or gave bad advice to the county."

Collins' comments were in response to a March 20 letter from state Rep. Roderick Scott, who said that Jefferson County has not been forthcoming with lawmakers about how it is trying to resolve its financial dilemma.

 

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