Alabama's Jefferson County on Sunday filed a negotiated restructuring plan to wind up America's largest municipal bankruptcy and lock in losses of as much as 70 cents on the dollar for JPMorgan Chase and other Wall Street creditors.
The court filing is the latest chapter in a saga of corruption and mismanagement of public finances that forced the most populous county in the southern U.S. state of Alabama to ask for protection from creditors in November 2011.
Nineteen months after filing for bankruptcy, and at a reported cost of $20 million in lawyers fees, the county is now on track to exit Chapter 9 by year's end. The defaults and losses imposed on bondholders of a scale not seen since the 1930s will translate into pricier borrowing by the county for decades, portfolio managers and analysts have said.
The county's debt ballooned in the mid-2000s, when warrants issued to upgrade its sewer system spiked amid bribery and fraud charges that led to some 22 convictions.
Larry Langford, a Democrat and former mayor of Birmingham, was sentenced to 15 years in prison for having accepted jewelry and lavish gifts for his role in deals that fueled the multibillion-dollar sewer debt.
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.
Details of the Jefferson County plan, which must be approved by U.S. Bankruptcy Court Judge Thomas Bennett, were hammered out in closed-door talks and rely on a planned sale by the county in late 2013 of about $1.9 billion of refinancing bonds.
"All major stakeholders in the case are or are expected to be supportive of the county's plan of adjustment," said David Carrington, president of the Jefferson County Commission.
Most major creditors, including bond insurers Financial Guaranty Insurance Co (FGIC), Assured Guaranty Ltd and a unit of Syncora Holdings Ltd, as well as seven hedge funds, agreed in recent weeks to substantial reductions in debt. County officials said owners of 82 percent of its debt were behind the 101-page plan, which includes locally unpopular sewer-rate increases to help pay the debt over coming decades.
JPMorgan, a big holder of the county's $3.1 billion of sewer warrants, took the biggest hit by agreeing to give up about $842 million of the $1.218 billion of sewer debt it holds, as well as other concessions. That will allow the big bank to recover barely over 30 percent of its sewer holdings.
The bankruptcy agreement is additional pain for JPMorgan, which in 2009 paid $75 million to the county and dropped credit-default swaps claims valued at $657 million as part of a settlement with federal regulators over alleged secret payments connected to Jefferson County bond deals.
The agreement also calls for increases in sewer rates of 7.41 percent a year for four years and comes after the county cut hundreds of jobs, ended in-patient care at a hospital for poor people in Birmingham, and slashed services.
Although the local economy is doing well with a 5.5 percent jobless rate, investors are likely to demand a premium when the county again taps the municipal bond market. Its planned $1.9 billion sale is likely to require Jefferson County to pay unusually high interest rates because of its defaults.
Jefferson County officials have said the negotiated deals would cost the county $200 million less, if enacted, than a tentative $2.05 billion agreement reached but never implemented ahead of the county's November 2011 bankruptcy filing.
Carrington, who bargained with creditors, said, "The plan achieves the fundamental bankruptcy purpose of giving Jefferson County a 'fresh start'."