BRADENTON, Fla. - Moody's Investors Service yesterday slashed to B3 from Baa3 the underlying rating on the sewer enterprise program Jefferson County, Ala. - the second rating agency to drop the county's $3.2 billion in sewer debt to below investment grade.

Moody's went a step further and placed Jefferson County's other credit ratings on review for possible downgrade, including the county's Aa2 general obligation rating, Aa3 lease revenue rating, A1 limited obligation school warrant rating, and A1 special tax bonds.

The agency initially downgraded the sewer credit to Baa3 from A3 on Feb. 26, shortly after the county filed its first material event notice regarding failed auctions for its auction-rate sewer warrants and its exposure to variable rates. As of Feb. 27, the county had experienced failed auctions on $869.5 million of auction rate securities out of about $2.2 billion outstanding. The county also has about $1 billion in variable-rate demand warrants under stress largely because of bond insurance company downgrades.

But a second material event notice, which was released Feb. 27 stating that the county may not meet its obligations, as well as an internal analysis and stress test on the county's cash position, led to yesterday's downgrade, said Patrick Mispagel, Moody's lead analyst on the credit. The B3 is on review for further downgrade.

Placing the county's other credits on review for possible downgrade, even those secured by specific revenue streams, is the result of extraordinary credit pressures and the sewer fund's limited resources, said Robert Kurtter, senior credit officer in Moody's public finance group. Kurtter noted that the county has not released details about how they are trying to resolve the situation.

"We simply don't know where this is headed," Kurtter said. "It is possible that one of the outcomes is a bankruptcy filing of some kind. A municipal bankruptcy is so uncertain and we don't know what a bankruptcy judge might rule.

"Until there's some firm proposal out there, some clarity, we thought it was important to make the bondholders of the general fund and of the related credits also aware there are some potential risks there," said Kurtter.

Although Kurtter said Moody's is reviewing all of its rated issuers with exposure to auction-rate securities and swaps, he said no other issuer is in Jefferson County's situation with a highly leveraged sewer system and narrow coverage.

To avoid termination of its 13 swaps, Jefferson County by Friday must post collateral or insurance in the amount of approximately $184 million, which was the amount necessary to terminate the swaps as of Feb. 27, according to the most recent material event notice.

Standard & Poor's late Friday downgraded the county's sewer debt to junk by lowering the rating to B from BBB. It kept the debt on its CreditWatch with negative implications.

The county's finance team reportedly was in New York on Monday and Tuesday meeting with bankers and bond insurers, according to the Birmingham News.

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