In the biggest municipal bankruptcy in this country to date, Alabama’s Jefferson County has sought Chapter 9 bankruptcy protection. The filing comes after the failure of state lawmakers to support an agreement with JPMorgan Chase & Co. (JPM) and other creditors to lower its over $3B debt tied to a sewer system. Now, Jefferson County’s creditors must contend losses in the hundreds of millions of dollars. There is also once more the worry that defaults may go up in the municipal bond market. This sewer-debt crisis has stalled economic progress in Alabama.
The accord that had been tentatively reached with creditors offered $1.1 billion in concessions and yearly sewer-raises of up to 8.2% for the first three years. Lawmakers, however, worried that these terms would take a toll on the poor, while creditors wouldn’t commit in writing to the agreement.
Jefferson County’s leading unsecured creditors are Bayerische Landesbank, a JPMorgan unit, and Depository Trust Co. In addition to sewer debt, the county owes approximately $1 billion. This includes $801M in school-construction bonds and $201M in general-obligation securities.
JPMorgan, which had over $1.2B of the county’s sewer debt as of May, didn't want Jefferson County to file for Chapter 9. It was just two years ago that the financial firm consented to pay $722M to settle SEC charges that its bankers issued payments to people affiliated with Jefferson County politicians to garner business. Larry Langford, a former county commissioner, was even convicted of receiving bribes.
It is up now to Jefferson County to demonstrated to a federal judge that it cannot cover its bills. It must also set up a plan for how to fulfill its commitments.
Municipal bankruptcies are different from corporate ones in that creditors are not allowed to sell or seize the county’s assets. A trustee also cannot be appointed to run the county. Just recently, Harrisburg, Pennsylvania also filed for bankruptcy. The state capital noted that it had millions of dollars in late bond payments linked to a trash-to-energy incinerator. In August, Central Falls Rode Island filed for bankruptcy protection. The city has nearly $21 million in outstanding debt, not to mention unaffordable pension costs.
Although municipal bankruptcies don’t happen as often as corporate bankruptcies, Jefferson County is the eleventh one this year. Prior to this bankruptcy, the largest one was in 1994 when $1.7B in interest-rate bets losses and approximately $2.2 billion in outstanding debt promoted Orange County, California to file in 1994.
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Jefferson County, Alabama, Votes to Declare Biggest Municipal Bankruptcy, Bloomberg.com, November 9, 2011
Jefferson County, Alabama to file for largest municipal bankruptcy, CNN, November 9, 2011
More Blog Posts:
Jefferson County, Alabama Votes to Settle its $3.14B Bond Debt with JPMorgan and Other Creditors, Institutional Investor Securities Blog, September 7, 2011
UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market, Institutional Investor Securities Blog, May 16, 2011
JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011