Jefferson County, Alabama, may learn today whether a federal judge will end its two-year-old bankruptcy by approving $1.5 billion in creditor concessions, the first time since the Great Depression a U.S. municipality has imposed principal losses on bondholders.
“I understand it is somewhat unusual,” U.S. Bankruptcy Judge Thomas Bennett said today of his plan to give an oral ruling from the bench followed by a written order. If the plan is approved at today’s hearing in Birmingham, the county seat, financing details could be completed by Dec. 3.
After battling in court for about 20 months, creditors owed $2.7 billion settled with the county in June by agreeing to accept less. A rise in interest rates forced more concessions, which were announced last month. The plan also imposes several years’ worth of rate increases on sewer users.
“It would be hard to say it was a success,” said Richard Ciccarone, chief research officer at Oak Brook, Illinois-based McDonnell Investment Management, which handles about $8 billion in municipal debt. “There are so many parties that failed here.”
The $4.2 billion bankruptcy, filed Nov. 11, 2011, was the largest by a U.S. city or county until it was overtaken in July by Detroit’s $18 billion case.
The case can be traced to an aging sewage system that federal regulators ordered fixed in the 1990s. To pay for the repairs, Jefferson County began borrowing money and refinancing old debt, issuing more than $3 billion in warrants and interest-rate swaps by 2003.
Local elected officials accepted bribes from construction contractors and financial advisers seeking business with the county. By 2010, 21 people, including four county commissioners, had been convicted or pleaded guilty to corruption-related charges, according to Peggy Sanford, a spokeswoman for the U.S. Attorney’s Office in Birmingham.
In 2009, JPMorgan Chase & Co. (JPM:US) signed a $722 million settlement with the U.S. Securities and Exchange Commission for its role in helping arrange the sewer debt.
As part of the June deal, New York-based JPMorgan agreed to forgive about $842 million of the $1.22 billion the county owes it. After interest rates rose, JPMorgan agreed to forgive about $100 million more in debt and to provide the county with a letter of credit for about $180 million.
Other creditors, including bond insurers and a group of hedge funds, also agreed to take less than they were owed.
The last major opposition to the plan comes from two groups of lawyers fighting to save the suits they filed on behalf of plaintiffs including sewer ratepayers. The lawyers asked Bennett to reject the plan so they can continue to sue JPMorgan and others behind the sewer debt.
Rejecting the plan would blow up the settlement, because the county agreed to halt those lawsuits in return for a reduction in principal on the $3 billion in sewer debt. Under the settlement, the sewer debt will drop to $1.98 billion with plan approval.
The plan calls for the bankruptcy court to retain jurisdiction for the life of the new sewer bonds the county will issue to fund the end of the case. This would allow the bond trustee to seek court approval to force the county to go forward with rate increases that were agreed to as part of the settlement with JPMorgan and other creditors.
The bond trustee could also seek court authority to require the county to impose future increases should rates not be high enough to cover the debt.
The case is In re Jefferson County, 11-bk-05736, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).
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