By Michael Connor
(Reuters) - Alabama's bankrupt Jefferson County agreed on Wednesday to a temporary hike in debt payments after lawyers for Syncora Guarantee Inc said the bond insurer's survival was threatened by shrunken payments on the county's $3.14 billion of sewer debt.
Lawyers for creditors and Jefferson County, which last year filed the biggest U.S. municipal bankruptcy case, said the county would pay $5.5 million monthly through May to service its sewer debt. Just over $5.25 million will be paid for February, lawyers said in a joint statement.
The county had reduced the payments to owners of its sewer system warrants by $9 million after January 6, when it regained control from a court-appointed receiver of the county's sewer system that was the main driver of its bankruptcy filing.
Lawyers for Syncora and other insurers responsible for any shortfall in the county's debt service accepted the deal during a bankruptcy court hearing in Birmingham, Alabama.
"It appears to be a useful and equitable solution of the issues," said Lawrence Larose, an attorney for the Assurance lawyer Assured Guaranty Corp that had supported a Syncora motion for higher payments by Jefferson County.
America's $3.7 trillion municipal bond market is keeping a close eye on the dispute over the sewer debt payments since investors expect specific-purpose obligations such as the Jefferson sewer debt to be paid even in bankruptcy. But the revenue-starved county has been assertive in limiting payments.
Syncora, a unit of Bermuda's Syncora Holdings, said in legal filings that the shortfall in county payments that it was obliged to replace had deeply rattled the firm.
"Syncora believes its very viability as a going concern may be threatened ...," Syncora lawyers said.
Along with Assured, Syncora asked U.S. Bankruptcy Judge Thomas Bennett, who oversees the county's $4.23 billion bankruptcy, to order a hike in sewer debt payments.
Syncora said it was responsible for 77 percent of shortfalls in timely payments of regularly scheduled principal and interest on the county's sewer debt. Assured is responsible for 13 percent, and Financial Guaranty Insurance Co for 10 percent.
Jefferson County was improperly deducting attorney fees and other expenses from the system's net revenue that is pledged to paying the system's massive debt, according to the legal documents filed by insurers.
Jefferson County said disputes over the size of payments since Bennett's January 6 ruling were inevitable and should be left to a hearing scheduled for April 4 and 5. The county has made debt service payments of $4.14 million and $2.26 million, according to a Jefferson County motion.
Wednesday's deal of minimum monthly payments would hold through May 31 unless Bennett rules differently before then, lawyers said.
Last Friday, Wall Street credit agency Standard & Poor's said Jefferson County had avoided a downgrade of its already low-rated sewer system debt after principal and interest payments due February 1 had been made. Moody's Investors Service said on Wednesday it was still reviewing Jefferson County's debt for possible downgrades.
Jefferson County, home to Birmingham, Alabama's biggest city, filed for bankruptcy on November 9 and has cut yearly spending by $100 million and plans an additional $40 million in budget reductions.
Creditors such as JPMorgan Chase opposed the filing, and Bennett has yet to rule on whether or not the county is eligible for Chapter 9 federal bankruptcy protection.
(Additional reporting By Verna Gates and Melinda Dickinson in Birmingham, Alabama)