Alabama County Misses Bond Payment; Wall Street Talks Continue
By William Selway
Oct. 1 (Bloomberg) -- Jefferson County, Alabama, won't make an $83.5 million payment on some of its $3.2 billion of sewer bonds, as it continues to seek more time to negotiate an end to the debt crisis that has pushed it close to bankruptcy.
Jefferson County Commission President Bettye Fine Collins said yesterday that Wall Street creditors indicated they would be willing to extend a new agreement allowing the county to avoid paying all that it is required on its bonds. Meantime, the county will miss a payment on a portion of the debt, she said.
``We don't have the funds to cover these interest payments,'' Collins, a Republican, said in a telephone interview from Birmingham.
Jefferson County, which includes Birmingham, has prepared to file for bankruptcy protection if it can't reach an agreement with JPMorgan Chase & Co. and other creditors to refinance bonds whose interest rates soared as high as 10 percent because of the U.S. financial crisis spawned by the subprime mortgage meltdown. The county is among U.S. states and cities in the $2.6 trillion municipal market whose finances have been pinched by debt costs that have risen more than fourfold in some cases.
Should the county seek court protection from creditors, it would be the biggest municipality to go bankrupt since 1994, when Orange County, California, was felled by bad investments.
The county since April has won agreements from banks and bond insurers to avoid making the full payments due on about $850 million of its sewer bonds, which pay adjustable rates that were reset periodically when investors had a chance to sell the bonds. JPMorgan, Bank of America Corp. and six other banks agreed to act as buyers of last resort, and they were left holding the bonds when investors wouldn't buy.
Debt Requirements
Because of credit-rating cuts to the county and its bond insurers, Jefferson County has also faced requirements that it pay off the debt early and pay to terminate its swap agreements. The county also has $2.2 billion of auction-rate debt, bonds whose interest rates are set through periodic bidding.
Jefferson County's latest agreement expired at 5 p.m. local time yesterday. Collins told reporters that she didn't expect any immediate repercussions from the missed payment or the expiration of the forbearance agreement, which would allow the banks to seek to collect what they are owed.
Governor Bob Riley, who brokered the county's agreement with creditors, was involved with the negotiations and indicated that the county's creditors would be willing to give it more time, she said.
``I don't have anything in concrete,'' Collins said shortly before the agreement expired yesterday. ``It appears that if we could work out another week without it costing the county anything, that would be a reasonable thing to do.''
Tara Hutchinson, a spokeswoman for Governor Riley, didn't immediately return a request for comment. JPMorgan spokesman Brian Marchiony didn't return phone calls seeking comment.
Court Fight
Syncora Guarantee Inc. and Financial Guaranty Insurance Co., which insure $2.8 billion of the bonds, have already sued the county, saying it should be stripped of its control over the sewer system because it has defaulted on its obligations under the terms of the $3.2 billion of bonds. The insurers recommended that the sewers be placed in the control of a receiver, who could raise rates to help pay back bondholders.
Jefferson County sought to save money by using variable-rate bonds paired with interest-rate swaps, a strategy promoted by Wall Street as a way to save money by getting short-term interest rates on debt that didn't mature for decades. It backfired this year, however, when Syncora and Financial Guaranty lost their top credit ratings following losses on mortgage-related securities.
Few Options
Jefferson County's sewer bonds are paid for only with the rates it receives from customers, and officials say they can't raise them enough to service the debt without hurting the poor. Plans to use other tax money died for lack of support.
Jim Carns, who has advocated bankruptcy as a way to end the nearly year long crisis, said the county has few options left. Bankruptcy would require the approval of the commission, a step three of whose five members have resisted.
``There's very little we can do,'' said Carns, a Republican. ``We're forced into a boxed canyon with little wiggle room.''
To contact the reporter on this story: William Selway in San Francisco at [email protected].
Last Updated: October 1, 2008 00:01 EDT
By William Selway
Oct. 1 (Bloomberg) -- Jefferson County, Alabama, won't make an $83.5 million payment on some of its $3.2 billion of sewer bonds, as it continues to seek more time to negotiate an end to the debt crisis that has pushed it close to bankruptcy.
Jefferson County Commission President Bettye Fine Collins said yesterday that Wall Street creditors indicated they would be willing to extend a new agreement allowing the county to avoid paying all that it is required on its bonds. Meantime, the county will miss a payment on a portion of the debt, she said.
``We don't have the funds to cover these interest payments,'' Collins, a Republican, said in a telephone interview from Birmingham.
Jefferson County, which includes Birmingham, has prepared to file for bankruptcy protection if it can't reach an agreement with JPMorgan Chase & Co. and other creditors to refinance bonds whose interest rates soared as high as 10 percent because of the U.S. financial crisis spawned by the subprime mortgage meltdown. The county is among U.S. states and cities in the $2.6 trillion municipal market whose finances have been pinched by debt costs that have risen more than fourfold in some cases.
Should the county seek court protection from creditors, it would be the biggest municipality to go bankrupt since 1994, when Orange County, California, was felled by bad investments.
The county since April has won agreements from banks and bond insurers to avoid making the full payments due on about $850 million of its sewer bonds, which pay adjustable rates that were reset periodically when investors had a chance to sell the bonds. JPMorgan, Bank of America Corp. and six other banks agreed to act as buyers of last resort, and they were left holding the bonds when investors wouldn't buy.
Debt Requirements
Because of credit-rating cuts to the county and its bond insurers, Jefferson County has also faced requirements that it pay off the debt early and pay to terminate its swap agreements. The county also has $2.2 billion of auction-rate debt, bonds whose interest rates are set through periodic bidding.
Jefferson County's latest agreement expired at 5 p.m. local time yesterday. Collins told reporters that she didn't expect any immediate repercussions from the missed payment or the expiration of the forbearance agreement, which would allow the banks to seek to collect what they are owed.
Governor Bob Riley, who brokered the county's agreement with creditors, was involved with the negotiations and indicated that the county's creditors would be willing to give it more time, she said.
``I don't have anything in concrete,'' Collins said shortly before the agreement expired yesterday. ``It appears that if we could work out another week without it costing the county anything, that would be a reasonable thing to do.''
Tara Hutchinson, a spokeswoman for Governor Riley, didn't immediately return a request for comment. JPMorgan spokesman Brian Marchiony didn't return phone calls seeking comment.
Court Fight
Syncora Guarantee Inc. and Financial Guaranty Insurance Co., which insure $2.8 billion of the bonds, have already sued the county, saying it should be stripped of its control over the sewer system because it has defaulted on its obligations under the terms of the $3.2 billion of bonds. The insurers recommended that the sewers be placed in the control of a receiver, who could raise rates to help pay back bondholders.
Jefferson County sought to save money by using variable-rate bonds paired with interest-rate swaps, a strategy promoted by Wall Street as a way to save money by getting short-term interest rates on debt that didn't mature for decades. It backfired this year, however, when Syncora and Financial Guaranty lost their top credit ratings following losses on mortgage-related securities.
Few Options
Jefferson County's sewer bonds are paid for only with the rates it receives from customers, and officials say they can't raise them enough to service the debt without hurting the poor. Plans to use other tax money died for lack of support.
Jim Carns, who has advocated bankruptcy as a way to end the nearly year long crisis, said the county has few options left. Bankruptcy would require the approval of the commission, a step three of whose five members have resisted.
``There's very little we can do,'' said Carns, a Republican. ``We're forced into a boxed canyon with little wiggle room.''
To contact the reporter on this story: William Selway in San Francisco at [email protected].
Last Updated: October 1, 2008 00:01 EDT
