Kenneth Klee, of Klee, Tuchin, Bogdanoff & Stern LLP, Jefferson County's bankruptcy attorney

BRADENTON, Fla. — Bankrupt Jefferson County, Ala., has a "story bond" to talk about and the marketing effort to do that got under way in earnest this week in advance of the $1.74 billion sewer system refunding warrant deal.

Pricing of the new debt is expected to begin with retail orders Nov. 18 and culminate the next day with institutional orders.

The deal is critical to the county's plan for exiting bankruptcy after two years in Chapter 9 reorganizing finances and downsizing.

Closing on the warrants, which is contingent on an order from the judge confirming the county's plan of adjustment, is one of the last steps that will seal the path for future elected officials who oversee Alabama's most populous county and its 660,000 residents.

Future County Commissions will be bound by the bankruptcy plan, the 40-year refunding debt to be sold, and the rate increases that support the new warrants, according to county, legal, and finance officials.

The confirmation hearing on the exit plan begins Nov. 20 in Birmingham federal court and is expected to last two days.

To be able to say that the plan is feasible, Jefferson County must go to the bond market for the first time in seven years with a story that will convince new warrant holders that their investments will be as safe as possible while refunding the old debt at average losses to those investors of about 50 cents on the dollar.

It's a balancing act that, if successful, will lead to a court order confirming the plan of adjustment by the end of day on Nov. 22, allowing the county to emerge from bankruptcy once the confirmation order is final about two weeks later, if no one appeals.

The refunding will allow the county to shed some $1.4 billion of the sewer system's $3.14 billion in debt.

A successful sale, said a trader, depends on how the deal is priced regardless of the intense public and headline scrutiny that has focused on Jefferson County since its November 2011 filing of the largest municipal bankruptcy in the country at the time.

"If it is priced cheap enough, people will buy it — headline risk and all," the trader said.

Citi, the book-runner for the deal, owns some of the sewer debt being refunded and proceeds from the sale will be used to purchase the bank's warrants, according to the 612-page preliminary official statement for the transaction.

The debt will span 40 years.

The new sewer warrants will be sold as $500 million of senior-lien warrants with insurance from Assured Guaranty Municipal, and $1.24 sold uninsured as subordinate lien warrants.

The senior and subordinate warrants will have their debt service reserves funded with an irrevocable letter of credit from JPMorgan as long as the debt is outstanding. The LOC was a recent, new concession from the bank, the county sewer system's largest creditor with $1.22 billion. JPMorgan will receive about 31 cents on the dollar from new warrant proceeds.

On Wednesday, Standard & Poor's assigned a preliminary underlying rating of BBB to the senior warrants and BBB-minus to the subordinate warrants with a stable outlook on the debt.

"The preliminary issue-level ratings are subject to Jefferson County's timely emergence from bankruptcy and consummation of its plan of adjustment in keeping with our expectations, including its proposed exit financing," said S&P analyst James Breeding. "The preliminary designation will be removed once the county has officially emerged from bankruptcy."

The senior warrants are expected to carry an AA-minus rating from Standard & Poor's by virtue of the Assured insurance.

Both the senior and subordinate debt will be sold with current interest, capital appreciation, and convertible capital appreciation structures.

"An interesting aspect to these warrants is that they are more secure than if they were issued by a non-bankrupt issuer," said county bankruptcy attorney Kenneth Klee with Los Angeles-based Klee, Tuchin, Bogdanoff & Stern LLP. "They've got some magnificent credit enhancements, and also very conservative income projections...expenses so revenues and expenses ought to come in as projected."

In confirming the plan of adjustment, Klee said the bankruptcy court will validate the sewer system rates as well as the 40-year warrants.

"Unless somebody takes a direct appeal there's no way to challenge this going forward," he said. "If the county does not raise rates in accordance with the modified finance plan, somebody could get a court order to do it."

No voting classes of creditors objected to the plan, Klee said. However, attorneys for two different groups of sewer system ratepayers are expected to lodge their objections during the Nov. 20 hearing.

"Our intention is to have the sale accomplished so we can tell the judge the plan is feasible," county bond counsel Foster Clark with Balch & Bingham LLP said when asked why the new warrants are pricing the same week as the confirmation hearing.

The closing and delivery of the warrants will be conditioned on getting the confirmation order, he said.

Part of proving that the plan is feasible will be showing the court that the sewer system can shoulder the debt and needed capital expenditures over the next 40 years.

According to a feasibility study by Garladi Rothstein Group, all expected capital expenditures, including those required by a federal consent decree, will be covered by the plan of finance from existing reserves on hand or revenues for the first 10 years.

For the next 30 years, approximately three-quarters of the capital needs can be covered from cash flow while the remainder could be financed, county officials said. Operations will also be funded with a property tax levied specifically for the sewer system, which amounts to $5 million to $6 million a year.

The debt and much of the expenses will be serviced from a new sewer rate system recently adopted by the county. The system increased the base sewage charge to $15 from $10.

Commercial rates are going up 3.49% this month, and 7.89% each year for the next three years along with residential rates. After that rates will increase 3.49% each year, unless adjustments are made.

Over the next 40 years, the County Commission can adjust rates up or down based on actual revenues, operating expenses, and capital investments, according to commission president David Carrington.

A long-time sticking point in the controversy over raising the county's sewer system rates has always been the cost for lower income residents because the system services so many of them.

However, Carrington said approximately 60% of customers are non-residential and the "vast majority of the burden is on businesses."

"One of the things we have now is a much more stable revenue base going forward," he said.

While the overleveraged sewer system has not expanded much over the years, plans are being made to change that, in part, to increase revenues as the region's economy grows.

Carrington pointed to a recent announcement by Gov. Robert Bentley, who said that the first phase of the 52-mile, $5.4 billion "Northern Beltline" bypass around Birmingham will move forward.

The Beltline will be a catalyst for new development, said Carrington.

"As soon as we exit bankruptcy, we will refocus our energies on economic development and job creation," he said.

In addition to Citi on the Nov. 18-19 sewer warrant pricing, members of the selling syndicate are Drexel Hamilton LLC, First Tuskegee Capital Markets, Jefferies LLC, Loop Capital Markets, Merchant Capital LLC, Morgan Stanley & Co., RBC Capital Markets, Securities Capital Corp., and Siebert Brandford Shank & Co.

Public Resources Advisory Group is the financial advisor.

Bradley Arant Boult Cummings LLP is disclosure counsel. Hawkins, Delafield, & Wood LLP and Lewis & Munday PS are co-underwriters' counsel.

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