Bankrupt Alabama county makes another deal ahead of final plan

Reuters News
Posted: Jun 27, 2013 3:44 PM
Bankrupt Alabama county makes another deal ahead of final plan

By Melinda Dickinson and Verna Gates

BIRMINGHAM, Alabama (Reuters) - Alabama's Jefferson County on Thursday approved another negotiated settlement covering $138 million of creditors' claims as the local government put finishing touches on a plan to wind up America's biggest municipal bankruptcy.

County officials said the so-called plan of adjustment, which includes years of rate hikes for sewer customers and a late 2013 sale by the county of $1.9 billion of refinancing debt, would be filed electronically on Sunday with the U.S. Bankruptcy Court for the Northern District of Alabama.

The court filing will be the latest chapter in a saga of corruption and mismanagement of public finances that brought the most populous county in the southern U.S. state to ask for creditors' protection in November 2011.

The county commissioners on Thursday voted 4 to 1 to approve the deal with Bank of Nova Scotia, State Street Bank & Trust and Bank of New York Mellon, which had been the county's liquidity banks and provided short-term loans.

The agreement will return 80 cents on the dollar to the banks, plus $2.7 million to satisfy claims of more than $20 million for interest costs tied to defaulted sewer debt, the commissioners were told during a commission meeting.

If implemented, the workout and the deals would impose the largest losses on municipal bondholders by a big U.S. local government since the 1930s.

Jefferson County's case may soon be eclipsed as the largest government bankruptcy in U.S. history by Detroit, a faded industrial center whose emergency manager has offered unsecured creditors as little as 10 cents on the dollar.

Home to Birmingham, Alabama's largest city, Jefferson County has already struck agreements with JPMorgan Chase and other creditors covering over 80 percent of the $4.2 billion of sewer-system and other debt that led to its bankruptcy filing.

As part of the agreements, the county will raise sewer rates by 7.41 percent a year over four years.

"This plan puts a financial burden on the rate payer. The bill for this falls on the poor," said County Commissioner George Bowman, who voted against the settlement.

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During a court hearing in the case on Thursday, U.S. Bankruptcy Judge Thomas Bennett suspended litigation in several disputes between creditors and the county and set aside the week of November 11 for confirmation hearings on the county's proposed plan.

Bennett's rulings included a refusal to end a stay on a claim brought on behalf of the sewer system's customers.

The claim argued that much of the system's $3.1 billion of defaulted debt was illegitimate and should not be paid off by rate-payers. Those arguments can be made at the November hearings ahead of Bennett's ruling on the county's plan, the judge said.

(Additional reporting by Michael Connor in Miami, editing by Tiziana Barghini and Dan Grebler)