Jefferson County officials have proposed their first negotiated debt restructuring as part of the Alabama county’s Chapter 9 bankruptcy case, but market experts have varying opinions about what it means.
The proposal covers a small piece of the county’s municipal debt.
Jefferson County and bond insurer Ambac Assurance Corp. proposed restructuring $82.5 million of lease revenue warrants sold in 2006 to build a courthouse and jail in Bessemer.
The 20-year warrants were sold by the Jefferson County Public Building Authority, and county commissioners were to make annual appropriations to pay the debt service.
At first the county moved to reject the lease in its bankruptcy case after having dipped into reserves to make debt service payments earlier this year. County officials also considered walking away from the property and moving court facilities to a nearby mall.
After negotiating with Ambac, an agreement was reached to reduce annual debt payments by the county and extend the final maturity by 11 years to 2037 from 2026.
Because of Ambac’s insurance, investors would not see any reduction or rescheduling of principal or interest payments.
With Ambac contributing to future debt payments “there should be no effect on holders of the lease warrants,” the proposal submitted to the court said. All scheduled payments would be made through a combination of sources, including the county, Ambac, reserves and other funds.
“As a result of this arrangement, the county will receive significant liquidity relief and a lengthy extended term for the effective repayment of Ambac’s advances under its policy,” the court filing said.
U.S. Bankruptcy Judge Thomas Bennett was to hold a preliminary hearing on the courthouse settlement this week. A final hearing is slated for Dec. 20.
The agreement may show that the county believes the courthouse is an essential public facility, but provide no clue about how officials will act on other debt, especially the $3.14 billion of sewer warrants, said Matt Fabian, managing director at Municipal Market Advisors.
“The county found it was too unpopular to get rid of that courthouse so they executed a typical scoop-and-toss restructuring,” Fabian said. “In theory, this exact kind of restructuring could have been done with the sewer debt years ago, but there is far too much antipathy toward bondholders for that.”
County commissioners have been negotiating with creditors about the sewer warrants. So far, no proposal has surfaced in court filings from those talks.
The courthouse lease restructuring proposal could be an important first step toward regaining access to the bond market, said Richard Ciccarone, managing director and chief research officer for McDonnell Investment Management LLC.
“I think that the county is making a symbolic show of reasonability that they are willing to work with creditors on financings that are apart from their sewer financing,” Ciccarone said. “Their future ability to access the capital market is dependent on their ability to convince the markets that they are willing to repay their debts.”
Paying debt on a delayed basis is better than not paying at all, he said. “This is a step that shows they are willing to work with creditors aside from the sewer financings.”
The county recently proposed a new rate system for sewer bills that officials expect will increase revenues by 5.9%.
The minimal increase has drawn protests from the trustee, Bank of New York Mellon, one of the insurers, Assured Guaranty Municipal Corp., and an ad hoc group holding $676 million of sewer warrants.
All three are seeking relief from the bankruptcy court, and that could drag out proceedings much longer. The county filed for bankruptcy in November 2011.
“If they dig their heels in too much, and too long, it will make it harder to ever regain access to the capital markets,” Ciccarone said.
