BRADENTON, Fla. — Although Jefferson County, Ala.’s sewer debt has been rated at junk level for quite some time, Moody’s Investors Service said Monday that the appointment of a receiver for the sewer system is a positive credit development for the county and bond insurers.
County Circuit Judge Albert Johnson appointed a receiver for the sewer system last week and found that the county violated bond covenants, defaulted on the bonds, and failed to pay $515.9 million of principal payments accelerated between June 2008 and July of this year.
“Given the protracted legal battle since the debt crisis began in 2008, Judge Johnson’s appointment of a receiver represents a major breakthrough in the standoff between the county, trustee, and insurers,” according to a report by Moody’s analyst Geordie Thompson. “It also paves the way for substantial recovery by the banks providing liquidity and continued scheduled repayment for other sewer-debt holders.”
Thompson said the ruling has positive implications for the protection of bondholders’ rights in Alabama by enforcing a trustee’s entitlement to default remedies delineated in bond documents.
Johnson ruled that the trustee of the sewer warrants, the Bank of New York Mellon, had a first priority lien on all funds of the sewer system and that the bond indenture for the sewer warrants was valid and enforceable under Alabama law.
“The county has failed to abide by the terms of the indenture and has failed to operate the sewer system in an economical, efficient and proper manner, and the public interest and the ends of justice will be best served by the appointment of a receiver,” the judge said.
John Young, former chief water technology officer and president of New Jersey-based American Water Works Service Co., was appointed receiver for the Jefferson County sewer system with all powers to manage it and impose rate increases.
“The appointment of the receiver is a credit positive for the county, as it provides a mechanism for additional revenue through rate growth on the sewer system, increasing the likelihood for full repayment on the $516 million in unpaid principal to date,” Thompson said.
The county refinanced nearly $3.2 billion of fixed-rate warrants into variable- and auction-rate sewer warrants in 2002 and 2003 to slow down rising costs on sewer ratepayers.
But the variable- and auction-rate structures collapsed amid the bond market meltdown in early 2008 as bond insurers were downgraded.
The county defaulted on the warrants when some bond insurers could not make payments and restructuring negotiations failed.
There have been recent reports that ongoing restructuring talks seek to have bondholders take a haircut on at least half of the outstanding sewer debt.
A source close to the county said it was not clear who was leading those discussions and that no restructuring agreement has been approved by county commissioners.
Filing for bankruptcy has been discussed by commissioners on numerous occasions, and they even ordered attorneys to prepare the paperwork, raising speculation that Jefferson County might file the largest municipal bankruptcy in U.S. history.
The non-recourse sewer warrants are payable solely from sewer revenues.
Along with Moody’s, the sewer warrants also carry non-investment grade ratings by Standard & Poor’s. The debt is not rated by Fitch Ratings.
Jefferson County has some variable-rate general obligation warrants that are rated below investment grade because they have not been restructured.