Bloomberg News

Jefferson County Refinancing Gets S&P Investment-Grade Score (2)

November 06, 2013

Jefferson County, Alabama, received an investment-grade rating from Standard & Poor’s for $1.74 billion of sewer-refinancing securities that may be issued in two weeks to help exit a two-year bankruptcy.

The rating company said in a statement today that it assigned a preliminary BBB score to the issue’s senior debt, two levels above speculative grade. S&P assigned a BBB- rating to the subordinate securities.

“The ratings, while reflective of our view of the credit quality of the issuer’s operations, the specific security, and the legal protections in place, also reflect our view of the potential residue a bankruptcy can leave on the municipality’s reputation,” S&P said in a statement citing analyst James Breeding.

The offering, which will price as soon as Nov. 19, is a result of a deal reached last month between the county and creditors to reduce the money the county must pay on its $3.1 billion in obligations. The accord replaced a settlement reached in June that became unworkable as interest rates rose. That deal provided $1.84 billion in cash to settle the debt.

Citigroup Inc. (C:US) bankers met tonight with dozens of potential investors in the securities at The Club, a private establishment atop Red Mountain with sweeping views of Birmingham, the county seat and the most-populous city in Alabama. County and bank officials wouldn’t allow a reporter to remain in the room during presentations and discussion of the deal.

Rate Increase

Banks underwriting the debt, which matures from October 2015 to 2053, according to a sale document, are being managed by Citigroup. The issue is divided between $500 million of senior warrants and about $1.24 billion of subordinate securities.

Sewer rates will rise almost 7.9 percent each year from 2014 through 2017, and by almost 3.5 percent thereafter through 2053, according to the document. For fiscal 2014, the county will have money to pay 180 percent of debt service.

Under covenants in the sale document, the county will adjust sewer-system fees and charges if the operation fails to meet debt-coverage ratios. The court can force the county to increase sewer rates, S&P said.

To repair its reputation and maintain its credit rating, the county, which has 660,000 residents and is home to Birmingham, Alabama’s most populous city, needs to demonstrate consistent willingness to pay its debts on time and in full without court intervention, Breeding said. It must meet forecasts for water-and-sewer usage and maintain the revenue available for debt service that is spelled out in the covenant for the new bonds.

High Turnover

S&P said the ratings are subject to Jefferson County’s timely emergence from bankruptcy.

In July, Citigroup said it would present a picture of securities poised to gain over the next five years as the finances improve, according to its underwriting proposal.

“Our targeted buyers for the warrants will not be long-term holders as is often the case with high-grade municipal bonds, but rather savvy short-term buyers who recognize the significant potential for improvement in the county and its warrants over time,” according to Citigroup’s proposal.

S&P said it didn’t anticipate rating changes “in the near term.”

Jefferson County became what was then the biggest U.S. municipal bankruptcy in 2011, when it couldn’t pay what it owed on more than $3 billion in bonds sold to finance sewer work.

Troubled Tunnels

Construction of the sewer system and a refinancing led by JPMorgan Chase & Co. (JPM:US) were riddled with corruption.

Larry Langford, a former county commission president, was convicted of accepting bribes for arranging the 2003 refinancing with JPMorgan and is serving a 15-year sentence. Two associates pleaded guilty, and two JPMorgan bankers are fighting Securities and Exchange Commission charges.

In all, 21 former county officials or contractors have been accused or convicted of crimes connected to the county sewers.

JPMorgan provided more than $900 million in concessions to allow the county to end its bankruptcy. In 2009, JPMorgan agreed to a $722 million settlement with the Securities and Exchange Commission over payments that the agency said its bankers made to people tied to county politicians to win business.

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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