Alabama Bond Sale May Establish Bankruptcy Template

Alabama Bond Sale May Establish Bankruptcy Template

 Jefferson County, Alabama sold $1.8 billion in bonds this month. What's particularly noteworthy about that is the county has been in bankruptcy since November 2011, after defaulting on $3.1 billion in sewer-revenue debt. The bond sale is part of the city's plan to exit bankruptcy by the end of the year. And if successful, it could become a model for other bankrupt municipalities. 
"To sell new bonds while you're in default on the old bonds, it really hasn't happened before," said Matt Fabian, managing director at Municipal Market Advisors. 
Jefferson County's unique bankruptcy exit plan calls for the Federal Bankruptcy Court in Birmingham to retain jurisdiction over the $1.8 billion in debt for its entire 40-year term; if the county ever falters, the court would have the power to enforce rate increases to generate the revenue needed to pay back the debt, with interest. 
"Without the assumption of court protection, the financing would have been more difficult, if not impossible," Fabian said. 
Jefferson's proposal is so unusual that there's been considerable variation among the nation's three largest ratings agencies about how to evaluate the county's debt. Standard & Poor's rated it at the low end of its investment-grade scale, either BBB or BBB-minus, depending on whether or not it is insured. (The Assured Guaranty Municipal Corporation charged $26 million to insure about $500 million of the $1.8 billion.) Fitch, however, rated the debt at the high end of its junk-grade range, BB-plus if insured or BB if not. And although Moody's Investors Service wasn't hired to rate the debt, it issued a special report stating a rating as low as B seemed appropriate, meaning the debt carried a "substantial-to-high credit risk." 
Potentially more problematic for Jefferson is that Alabama's Attorney General has said the county's existing sewer rates are unconstitutional, let alone higher ones in the future. And there's apparently no precedent for a clash between a state constitution and a federal bankruptcy ruling. 
But the county told the bankruptcy court its plan should be approved because "it is the result of extensive, arm's-length, and good faith negotiations" and its creditors overwhelmingly approved it. The county will also now be able to point to its successful bond sale as proof that the markets believe the plan is feasible. (NEW YORK TIMES) 

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