A US judge has paved the path for the creditors of Jefferson County, Alabama to vote on a plan to conclude what is being called the second biggest municipal bankruptcy in US history. Now, the county’s creditors—they are owed $4.2 billion—have until October 7 to vote.
Most of them have already agreed to the negiotiated plan, which would deliver just $1.735 billion to warrant holders of the county’s sewer system that are owed $3.078 billion. A deal has also been reached over non-sewer debt.
It will be up to US Bankruptcy Judge Thomas Bennett to look into a timeline that would wrap up Jefferson County’s bankruptcy. He is the one who approved the vote on the plan. If creditors the plan, it will need to be confirmed during a hearing that would take place in November.
The debt-reduction plan is based on a settlement reached between Jefferson County, and JP Morgan Chase & Co (JPM), hedge funds, and other creditors. The financial firm and the funds hold most of the $3 billion in sewer warrants. The county wants to cancel these and approximately $2 billion of new debt would replace them.
Per the plan, JPMorgan would get back 31% of the $1.22 billion owed to it. Several hedge funds would get over 80% of $872 million. Meantime, Jefferson County would up sewer rates of 7.4% a year for four years, susceptible to an increase if interest rates see one too.
As for warrant holders that are owed over $500 million and not included in the deal, they are allowed to vote either to collect 65 cents/dollar owed or, if they surrender the right to get money from insurers, they could get 80 cents for every dollar. The reductions in sewer warrants would be the first time investors of municipal bond in this country would be compelled to sustain losses on the principal they are owed because of a US bankruptcy case. Jefferson County’s bankruptcy is linked to a sewer refinancing marred by political corruption.
Unlike with corporate bankruptcies, creditors cannot seize or sell the county’s assets in a municipal bankruptcy and a trustee cannot be appointed. Recently, the city of Detroit, Michigan made national headlines when it filed the biggest municipal bankruptcy in the US to date and sought Chapter 9 protection. The city has about $18 billion in liabilities.
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U.S. judge OKs vote on Alabama county’s bankruptcy plan, Reuters, August 6, 2013
Jefferson County Investors Seek Debt Vote as Exit Approaches, Bloomberg Businessweek, August 6, 2013
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