BRADENTON, Fla. - Analysts say Jefferson County, Ala.'s proposed sewer debt restructuring plan faces numerous challenges, including a dysfunctional bond market and skeptical investors who may demand interest rates that make a deal unworkable.

The lingering sewer debt crisis also has raised concerns about other credits in Alabama, which one market expert said has failed to quickly come to the aid of its most populous county, home to the city of Birmingham, as other states have done in similar cases.

Negotiations to restructure the troubled debt are taking place against a backdrop of calls from some influential individuals, including two of the five county commissioners, for the county to file for bankruptcy protection from its creditors.

"This plan appears tenuous as it assumes a large bond offering into an unwelcoming market that is likely predisposed to either reject the credit altogether or demand yields high enough to erode the transaction's economics," said Matt Fabian, managing director at Municipal Market Advisors, wrote in his Weekly Outlook column on Monday.

Fabian concluded that because it entails a massive "debt repudiation" encouraged by the state itself, he believes investments in Alabama carry "substantially more risk than traditional muni safe sector bonds."

Fabian, in his second statement in two weeks concerning Jefferson County, advised holders and potential buyers of Alabama bonds - including state-issued debt - to screen credits as if they were issued by U.S. corporations or high-yield municipals.

"Wow," reacted an investor in Jefferson County's bonds after reading Fabian's report. The investor, who asked not to be identified, also called the month's-long unresolved financial crisis in Alabama's largest county "very depressing."

Jefferson County since mid-February has tried to restructure $3.2 billion of sewer debt, most of which is in troubled auction- and variable-rate mode, covered by more than $5 billion of swaps that have turned against the county.

In late August, county commissioners took an offer by Republican Gov. Bob Riley allowing him to facilitate work-out negotiations after their talks stalled.

Riley called on the New York Insurance Department to help with negotiations because it regulates the banks and bond insurers that are Jefferson County's creditors, including JPMorgan, Financial Guaranty Insurance Co., and Syncora Guarantee Inc. FGIC and Syncora insure most of the sewer debt and they have filed a federal lawsuit seeking a receiver for the county's sewer system. A hearing is scheduled Nov. 17.

Last week, some details about a proposed restructuring plan were unveiled by New York insurance officials.

In return for $650 million in cash concessions and $350 million in torn-up swap agreements and other fees from creditors, Jefferson County must agree to place the sewer system under a control board and a covenant to increase sewer rates less than 3% a year as well as come up with approximately $26 million of additional revenue to help pay down some of the sewer debt.

The plan would result in a refinancing of the sewer debt, a commutation of bond insurer policies, and most likely would include deeply subordinated debt. It also includes a controversial suggestion that the Legislature allow the county to use excess revenue from an existing sales tax to help pay down some of the sewer debt.

"The county and state may well need to find a specialized buyer (perhaps the state pension fund) to take down this sale in a private offering," Fabian said. "Because this plan entails a massive, $650 million debt repudiation ... and because it was encouraged by the state itself, we continue to see investments in the state (including state general obligation bonds) or any of its subdivisions as carrying substantially more risk than traditional muni safe-sector bonds."

Repudiation means permanent default, Fabian pointed out. Riley's office could not be reached for comment about Fabian's posting on Monday.

Fabian's harsh warning most likely is in reaction to the state's atypical and late response to Jefferson County's situation, which came six months after the county began negotiating and now apparently is affecting the entire state, a market expert said.

While the negotiating has been done behind closed doors, with creditors refusing to comment, Riley has reiterated that creditors must "share the pain" and less than three weeks ago he said Wall Street wasn't making needed concessions.

Unlike other state responses to the fiscal distress of their local governments in the past, Alabama's top elected leaders have not stepped in quickly to put safeguards in place to assist Jefferson County, the market expert pointed out.

In fact, when the county's state representative, Roderick Scott, attempted to pass legislation in April to establish debt issuance and restructuring safeguards, several bills he proposed received no support from other local lawmakers and died.

"My whole point is when you look at significant crises that have happened, the state actually said we've got a problem, let us act quickly, we'll do the financing for you, and you can pay us back," the market expert said.

Pennsylvania in 1991 created the Intergovernmental Cooperation Authority Act to provide oversight and assist Philadelphia out of a financial crisis. In the mid-1970's, the state of New York created the Municipal Assistance Corp. to help bring New York City back from the threshold of bankruptcy.

Florida, for example, creates a financial emergency oversight board when local governments are deemed to be in financial distress.

One well known example in Florida came Oct. 8, 1996, when then-Gov. Lawton Chiles issued an executive order appointing a financial oversight board for Miami, which was teetering on the verge of bankruptcy.

Since some details concerning Riley's proposed restructuring plan for Jefferson County emerged, local lawmakers have balked at the suggestion that they approve using portions of the existing local sales tax to pay down some of the sewer debt.

Riley's plan did not change the minds of two Republican members of the Jefferson County commission, Jim Carns and Bobby Humphryes, who on Tuesday voted for a resolution that would have authorized the county to file for bankruptcy. The two have been proponents of bankruptcy for several months.

Commission President Bettye Fine Collins, a Republican, and commissioners George Bowman and Shelia Smoot, both Democrats, voted on Tuesday against filing what would be the largest municipal bankruptcy in U.S. history. The trio has been a voting block against bankruptcy for several months but some members have, at times, expressed frustration at failing to get support from lawmakers to resolve the financial crisis.

In another development Monday, Riley said the U.S. Treasury Department refused his request to provide a backstop for Jefferson County's restructuring plan.

Riley had asked Neel Kashkari, who oversees the Treasury's new Troubled Asset Relief Program, for the backstop. Riley said he was told the program would not provide a backstop to any city or county.

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