UPDATE 1-S&P cuts Jefferson County Alabama underlying ratings

Fri Feb 8, 2013 4:32pm EST

NEW YORK Feb 8 (Reuters) - Standard & Poor's Ratings Services cut on Friday the underlying ratings on bankrupt Jefferson County, Alabama, to D from C after the decision by the creditors' trustee, the Bank of New York Mellon, to suspend payment on Feb. 1.

The rating agency added that bonds affected are series 1997A, 2001A, 2003-B-8, 2003 B-1-A through series 2003 B-1-E, and series 2003 C-1 through 2003 C-10 sewer system revenue warrants.

Moody's Investors Service, which rates Jefferson County sewer warrants at Caa3 negative, said on Friday that the suspension of payments exposes the warrant holders to greater losses.

The ratings agency plans to review the implication of the suspended payments on the current ratings.

Out of the total $4.2 billion debt in Jefferson County's bankruptcy - the largest in the U.S. history - the biggest chunk is represented by $3.14 billion in sewer warrants.

When re-marketing this debt failed during the financial crisis, the interest rate that Jefferson County had to pay on these warrants reset to higher penalty rates, Moody's said.

The county defaulted on those warrants first and on other debt, including its fixed rate General Obligation warrants, afterward.

Until now, holders of certain bank warrants, "which are on an accelerated repayment schedule and which had principal payments overdue, had consented to the trustee's making distributions on the Sewer Warrants as if no payment defaults had occurred on the bank warrants," said Moody's in its note.

Last week, the trustee revealed that some holders of the bank warrants are no longer willing to consent to the trustee making distributions on the Sewer Warrants as if no payment defaults had occurred on the bank warrants. The result is the payment suspension.

Earlier this week, the bank of New York Mellon Corp, asked the U.S. bankruptcy court to allow an accelerated payment. The preliminary hearing is set for March 7.

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