Jefferson County, Alabama files largest municipal bankruptcy in U.S. history
By Steven Church, William Selway, and Dawn McCarty
9 November 2011 Jefferson County, Alabama, filed the biggest U.S. municipal bankruptcy after an agreement among elected officials and investors to refinance $3.1 billion in sewer bonds fell apart. The county, home to Birmingham, the state’s most-populous city, listed assets and debt of more than $1 billion in Chapter 9 papers filed today in U.S. Bankruptcy Court in Birmingham. The county’s bankruptcy attorney, Kenneth Klee, said the filing was necessary because talks with creditors and the receiver in charge of the sewer system built by the bonds broke down. “There was an impasse reached,” Klee said in an interview today. “None of the creditors — zero — signed up to the deal that we have been negotiating for six weeks.” The county’s major creditors, including JPMorgan Chase & Co. (JPM), signed tentative agreements in September to reorganize the sewer debt to avoid bankruptcy. County officials said at the time that JPMorgan would provide $750 million of about $1.1 billion in concessions. By October, the tentative deal began to fall apart as disagreements emerged among Jefferson County’s 25 state lawmakers. The deal required action by the state Legislature to help the county close its budget deficit, create an independent sewer authority and give state moral-obligation backing to new sewer debt. The county and bondholders are about $140 million apart on how much sewer debt the county can bear, Klee said. The county would accept $2.05 billion, while creditors demanded more, he said. The county also differed with the court-appointed receiver who runs the plant that was built with the defaulted bonds. The county was willing to raise rates paid by residents by 8.2 percent initially. The receiver wanted an 8.4 percent hike, Klee said. Both sides agreed that more hikes would come in the years that followed. Thomas B. Bennett, chief judge of U.S. Bankruptcy Court in Birmingham, was named to oversee the case by the head of the 11th Circuit Court of Appeals. The first hearing in the case will be at 10 a.m. tomorrow, said a person who answered the phone in Bennett’s chambers who declined to be identified. […] The bankruptcy leaves banks such as JPMorgan, individual investors and bond insurers Financial Guaranty Insurance Co. and Syncora Guarantee Inc. facing hundreds of millions of dollars in losses. It may also burden county residents and businesses with higher taxes or sewer bills, which already have risen more than fourfold since 1997. Jefferson County was a victim of the credit crisis in 2008. The sewer system’s floating-rate securities were coupled with interest-rate swaps, in which two parties make periodic payments based on an underlying measure of borrowing costs. The contracts, arranged by New York-based JPMorgan, were supposed to save money by offsetting the floating rates the county paid and giving it a fixed rate that was lower than on traditional bonds. The strategy backfired in early 2008 as the subprime-mortgage market meltdown sent ripples through Wall Street, undermining the credit ratings of companies that insured Jefferson County’s bonds. […]
