Jefferson Co., Alabama in trouble

Discussion in 'Economics' started by TheStudent, Mar 1, 2008.

  1. Alabama County's Debt Cut to Junk on Credit Squeeze (Update2)

    By Martin Z. Braun

    Feb. 29 (Bloomberg) -- Jefferson County, Alabama's $3.2 billion of sewer bonds were cut to junk status after the county said it may be unable to pay banks holding its floating-rate debt or make collateral payments on its interest-rate swaps.

    The downgrade by Standard & Poor's may force the county, which includes Birmingham, to buy back $847 million of floating- rate debt and terminate $5.4 billion of interest-rate swaps at a cost of $184 million. As of Jan. 31, the county's sewer fund had $193 million in hand, Moody's Investors Service said on Feb. 27.

    ``We realize there's going to be added pressure due to the rating downgrade,'' said Sussan Corson, an analyst at S&P, which slashed the county's sewer debt by six levels to B, five steps below investment grade. S&P said it will keep the bonds under review for possible further downgrade.

    Jefferson County, perhaps more than any other U.S. municipality, is facing the consequences of a faltering credit market that has caused investors to shun floating-rate securities, including auction-rate debt, guaranteed by troubled bond insurers and banks refusing to buy unwanted debt.

    About 80 percent of Jefferson County's $3.2 billion sewer debt was issued as floating-rate or auction-rate bonds and insured by FGIC Corp. and XL Capital Assurance, whose ratings have been downgraded.

    `Current Difficulties'

    ``The county is working with its advisers to identify and analyze all feasible means to address the current difficult situation,'' the county said in a disclosure notice yesterday. ``However, as of the date of this notice, the county can provide no assurance that net revenues from the sewer system will be sufficient to permit the county to meet the interest rate and amortization requirements of the liquidity facilities.''

    Jefferson County Commission president Bettye Fine Collins didn't immediately return a call seeking comment.

    About $2.2 billion of the sewer debt consists of auction- rate securities. The county has experienced failed auctions on $869.45 million of the debt, causing rates to rise to as high as 6.25 percent, up from 4.7 percent. When an auction fails because there aren't enough bidders, rates are set at a ``penalty'' level determined at the initial bond offering.

    Dealers that run the periodic bidding to set yields on auction bonds aren't buying unwanted securities as they once did, triggering thousands of failures that are driving up interest rates. Bankers who help to find buyers for so-called variable-rate demand obligations are also declining to hold the debt when they can't attract investors, mirroring the breakdown in the auction market.

    Rising Interest Cost

    Standard & Poor's and Moody's cut Jefferson County's sewer debt rating amid rising interest costs on auction-rate and floating-rate bonds. In addition, swaps that the county bought to shield it against the risk of increasing rates have backfired, driving costs higher.

    Moody's on Feb. 27 lowered Jefferson County's rating three levels to Baa3, the lowest investment grade, from A3.

    The Moody's downgrade triggered a county requirement to post collateral on its 13 swaps with banks including JPMorgan Chase & Co. and Lehman Brothers Holdings Inc.

    The collateral call led S&P to put the debt yesterday evening on negative outlook. The rating company decided to cut the rating to junk after examining the disclosure notice the county filed.

    `Increasing Uncertainty'

    ``Due to the material event notice release yesterday afternoon and the language in their material event notice, Standard & Poor's at that time decided that there was increasing uncertainty associated with this credit rating and decided to downgrade the bonds,'' Corson said.

    If the county couldn't post collateral or get insurance for the swaps, it would have to terminate the agreements at a cost of $184 million as of Feb. 27, the county said in its disclosure document.

    Jefferson County has paid interest rates as high as 10 percent on $847 million of floating-rate bonds because FGIC Corp. and XL Capital Assurance, which guarantee the debt, had their ratings cut.

    The insurers' downgrades may cause banks who agreed at the time of the initial debt sale to repurchase unwanted county floating-rate debt to terminate their agreements. That would force the county to buy back the bonds.

    To date, dealers receiving tendered Jefferson County floating-rate bonds from investors have failed to remarket $567 million of the debt, forcing the banks of last resort, such as Birmingham-based Regions Bank and Paris-based Societe Generale, to buy them.

    `Immediate Payment'

    ``If the bank demands immediate payment, it is unclear how the county would be able to meet this obligation given its current cash position,'' Moody's said on Feb. 27.

    If the banks don't demand immediate payment, the county would have to make 16 quarterly principal payments of as much as $53 million to acquire all the outstanding debt.

    To contact the reporter on this story: Martin Z. Braun in New York at ;
    Last Updated: February 29, 2008 20:29 EST
  2. WarEagle

    WarEagle Moderator

    That would be my great county, lol. Decades of mismanagement, incompetence and outright fraud have created a real utopia... and to top that, we just elected one of the county commissioners responsible for this mess as mayor of Birmingham. The same guy who created a "charity" to spend tax money on laptops for schools of which a big chunk was wasted, including casino trips, computers for friends and $30k paid to a gay porn star.

  3. Damn Awbun fans have run the place into the ground.

  4. Dennis Kneale says buy. This is just a hickup.

    When you hickup and your spleen lands on the floor, take heed.
  5. Don't you find it ironic that the sewer bonds are in the toilet?
  6. :D :D
  7. I'm confused. The feds lower interest rates and the rating agencies cause interest rates to rise.
  8. yeah it just shows how much credibility Kneale has and CNBC ... to hire a clown like that , (and alot of the others there too) doesn't it ?
  9. Total of all county debts is $4.6 billion
    263,000 households
    Only $17,500 per household
    We need more money
    What about the children
  10. This is why I come back to ET ... you can't find quality entertainment like this on the tee vee. Thanks WarEagle.
    #10     Mar 1, 2008