SEC deal may prove false dawn for Alabama county

ATLANTA (Reuters) - A deal between U.S. regulators and J.P. Morgan Securities to settle charges over secret payments to Alabama's Jefferson County may prove a false dawn for the debt-ridden county.

County officials welcomed the settlement, but analysts said on Thursday it will not unravel its multibillion-dollar sewer-system bond debt, which still threatens to force the county into the biggest municipal bankruptcy in U.S. history.

While the deal may give the county leverage in talks over the debt that have lasted 20 months, it still faces a fundamental problem -- Jefferson County's sewer system generates insufficient revenue to pay creditors.

The settlement "is not a fundamental game changer," said Melissa Woodley, assistant professor of finance at Alabama's Samford University. "The biggest problem has always been the sewer bonds, and that is still there."

On the face of it, the settlement announced on Wednesday is good news for Jefferson County, which accumulated its debt earlier this decade by using complex bond and swap transactions to refinance improvements to its sewer system.

But that debt mushroomed in February 2008, when ratings agencies downgraded the county's bond insurers. Earlier this week, the debt stood at close to $4 billion and counting as interest costs of roughly $75,000 accumulate each day.

Under the settlement, J.P. Morgan Securities will pay a penalty of $25 million to the U.S. Securities and Exchange Commission (SEC) and will pay the county $50 million.

The bank will also forfeit more than $647 million it claimed in termination fees, making a significant dent in the total owed by the county.

At the same time, the SEC has filed a civil complaint against two former J.P. Morgan employees in connection with their conduct during the swap transactions.

"VICTIM STATUS"

County commission president Bettye Fine Collins described the deal as "significant" and said it "greatly" enhanced the county's financial position.

Yet she sought to couch the deal not so much in terms of the overall reduction of the debt, and more in terms of the assignment of responsibility for its accumulation.

She cited a letter she wrote to SEC chairman Mary Schapiro in June asking the commission to consider the county's "status as a victim of these violations in negotiations with J.P. Morgan."

"It is appropriate for the SEC to include, in its settlement, relief that will help Jefferson County in its efforts to resolve the sewer debt and avoid bankruptcy," she wrote.

Jefferson's debt matters to bondholders and banks as well as to Alabama's economy because Birmingham, the state's largest city is situated at the heart of the county. Bankruptcy for the county could limit the state of Alabama's ability to raise money through bonds.

Governor Bob Riley last year took a lead role in debt talks, though there has been little sign of significant progress.

This could in part be because the county's trump card, the threat of bankruptcy, is one it is reluctant to play, analysts said.

At the same time, other factors have crept in to slow down any talks, including a short-term revenue crisis in Birmingham in August that forced the county to lay off 1,000 municipal workers.

This week's SEC settlement could help to revive the negotiations, county officials said.

"We are continuing to negotiate with non-conflicted banks and liquidity providers," said county attorney Jeff Sewell. "If an opportunity arises to help solve the crisis, now is a good time because the net revenue of the sewer system is not sufficient to refinance the debt."

One key issue in the talks is how much the creditors should shave off the debt and how far interest payments should be lowered, according to analysts.

WHO TO BLAME?

Recent events in Alabama have spotlighted the role of corruption in the initial sewer bond transactions.

Last week Birmingham Mayor Larry Langford was convicted on 60 counts of fraud, bribery and criminal conspiracy over financial dealings he was involved with earlier this decade when he was the county commission's president.

Prosecutors cited his illegal dealings with J.P. Morgan (JPM.N), the county's largest creditor, as well as other banks.

The conviction bolstered the county's argument that it did not know what it was doing when it entered into the fatal bond agreements and was duped by crooked officials seeking maximum transaction fees.

The point might bolster the county's case with the public -- and county officials face re-election next year -- but it will not unlock debt talks, according to Andreas Rauterkus, a professor of finance at the University of Alabama at Birmingham.

"It (the SEC settlement) makes it easier to point fingers, but it does not change the fact that they are going to have to pay the money back," he said.

(Additional reporting by Melinda Dickinson in Birmingham)