Jefferson County, Alabama, filed a plan to end the biggest U.S. municipal bankruptcy later this year by cutting $1.2 billion in principal payments to investors holding defaulted sewer-related debt.
Less than $100 million of the county’s $4.2 billion in debt will be paid with no changes to the terms of the original lending documents. Sewer warrant holder JPMorgan Chase & Co. (JPM:US) will collect 31 percent of what it is owed, while some general obligation bondholders will lose the right to collect penalty fees and a higher, default interest rate.
The sewer warrant reductions mark the first time U.S. investors holding municipal debt have been forced as part of a bankruptcy case to take losses on the principal owed to them.
“The plan solves both of the problems that prompted the commission to file the largest Chapter 9 bankruptcy case,” Jefferson County Commissioner David Carrington said yesterday in an e-mailed statement. In addition to struggling with the sewer debt, the county missed payments on general-obligation bonds backed by taxes.
The plan is based on a settlement announced last month that included JPMorgan, seven hedge funds and a group of bond insurers, which together hold about $2.4 billion of the debt. The group will split about $1.84 billion, with JPMorgan taking the biggest cuts, collecting $375 million of the $1.22 billion it is owed, according to the plan filed yesterday in U.S. Bankruptcy Court in Birmingham, Alabama.
None of the county’s more than $3 billion in sewer-related warrants will be fully repaid, with most, except for JPMorgan, getting back about 80 cents on the dollar. That debt is tied to sewer fees that haven’t been high enough to cover the interest and principal payments.
Even some creditors being fully repaid with their normal interest rate were affected by the bankruptcy. Under the proposal, school warrant holders owed about $720 million were classified as “impaired” because they would see minor changes to the terms of their agreements. General obligation bondholders owed more than $100 million would give up the right to collect penalties and so-called post-petition interest triggered by the county’s bankruptcy.
About $95 million in general obligation bonds are considered unimpaired, which means they wouldn’t see any change in their rights under the proposed plan.
The settlement ended more than 18 months of bankruptcy court battles between the county and its biggest creditors over how much the jurisdiction can afford to pay on more than $3 billion it borrowed to expand and improve the county’s sewage system.
By filing its so-called plan of adjustment, the county begins a process designed to end in November, when U.S. Bankruptcy Judge Thomas Bennett will hold a hearing on whether to approve the proposal. Bennett will consider the plan after creditors who aren’t part of the settlement have a chance to object.
The county asked Bennett to hold a hearing Aug. 6 to approve disclosure materials that explain the plan to creditors who are voting on it. Should the plan win final court approval, the county will refinance its sewer-related debt, raise sewer rates and exit bankruptcy.
Hedge funds owed about $872 million will collect more than 80 cents on the dollar, according to the agreements. The hedge funds will also help backstop the refinancing to ensure that the county can raise all of the money it needs.
The funds include Brigade Capital Management LLC, Claren Road Asset Management LLC, Fundamental Advisors LP and Monarch Capital Master Partners LP, according to court records.
Insurers, including Assured Guaranty Municipal Corp., Syncora Guarantee Inc. and Financial Guaranty Insurance Co., will get $165 million. They claimed to be owed $315 million.
The county will also pay as much as $25 million in any claims filed against the insurers by creditors seeking to recover losses, according to the agreements.
Under the plan, the county will raise sewer rates 7.4 percent annually for four years. Those rates may go slightly higher if interest rates rise before the refinancing is completed.
Warrant holders who are owed more than $500 million aren’t part of the deal. They will have a choice of collecting 65 cents on every dollar they are owed, or 80 cents on the dollar if they give up their right to collect money from the insurers.
The bankruptcy is tied to a sewer refinancing tainted by political corruption. In 2009, JPMorgan agreed to a settlement with the U.S. Securities and Exchange Commission over payments its bankers allegedly made to people tied to county politicians to win business.
JPMorgan, based in New York, paid the county $75 million in that settlement and has given up more than $657 million in swaps claims it held.
Jefferson County supplanted Orange County, California, as the largest municipal bankruptcy. Orange County entered court protection in 1994 after losing $1.7 billion on interest-rate bets.
While its petition initially listed more debt than Jefferson County, much of that liability was reduced in the early weeks of the case. Thanks partly to lawsuits against the financial firms, Orange County creditors were paid in full.
The case is In re Jefferson County, 11-bk-05736, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).
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