DALLAS - Moody's Investors Service has lowered its ratings on $270 million of Jefferson County, Ala.'s general obligation debt to Caa1 from B3. The agency also lowered to Caa2 from Caa1 the rating on $86.7 million in outstanding lease revenue warrants issued through the Jefferson County Public Building Authority.
The outlooks on both have been revised to negative.
Moody's also confirmed the Caa3 rating on the county's $3.2 billion in outstanding sewer revenue debt. The outlook on the debt was revised to negative.
Geordie Thompson, a vice president and senior analyst for Moody's, said the negative outlook was assigned because it is not clear that a solution to the county's financial crisis - either through successful negotiation with creditors, bankruptcy, or other means - would come within the watchlist timeframe.
"That is typically a 90-day window, and we're not sure anything will happen within that period," Thompson said. "We had all the county's debt on the watchlist, and we changed all of them to a negative outlook.
"There are so many moving parts in this, and the outlook shift reflects our uncertainty about what is going to happen," he said. "Something certainly could happen within the next 90 days, but the outlook has a longer period of up to 18 months to two years."
Thompson said Moody's removed the sewer revenue debt from watchlist because the county, the liquidity banks, and bond insurers continue to actively negotiate repayment terms of the $3.2 billion of outstanding sewer debt, of which some $800 million is in the form of variable-rate demand obligations held by liquidity banks as bank warrants. The remainder of the sewer debt is held by bondholders as auction-rate debt.
Jefferson County has failed to make scheduled principal payments on the bank warrants - which is required every three months - since April 2008 but has continued to make interest payments on all sewer debt. The latest agreement between the county and its liquidity banks extends forbearance agreements on the sewer-related bank warrant principal payments through May 29.
Counterparties have terminated interest rate swaps associated with the county's sewer debt, requiring estimated payments by the government of approximately $750 million.
Thompson said the downgrade of Jefferson County's GO debt is based on its continued failure to make full principal payments on general obligation bank warrants held by liquidity providers.
The county failed to make the first two payments, in September 2008 and on March 15, 2009, Thompson noted. The liquidity banks have extended a forbearance agreement through June 20, but Moody's said the warrant holders are not likely to receive full payment.
"We believe that there is still a heightened risk that the county will avail itself of federal bankruptcy protection," Thompson said in the report.
If it does, Thompson said, it is unclear which county revenues, assets, and debt obligations could be affected by the legal proceedings and that a bankruptcy filing could weaken the county's ability to meet these other debt obligations.