Talks resume over Alabama county's debts

By Melinda Dickinson

BIRMINGHAM, Alabama (Reuters) - Wall Street lenders, bond insurers and Alabama's Jefferson County were again in talks aimed at averting a possible bankruptcy filing by restructuring $3.2 billion of debt, a county official said on Tuesday.

A Chapter 9 bankruptcy filing by Jefferson County, which is home to the state's biggest city, appeared imminent last week until Gov. Bob Riley entered the talks and helped win another stand-still agreement against default while the lenders weigh a new restructuring proposal for the county's soured debt.

The previous stand-still agreement expired on Friday and its expiration might have triggered what could have been the largest municipal bankruptcy filing in U.S. history.

But, Riley, a Republican, announced last week the lenders had agreed to present the county with a proposed forbearance agreement against default valid through September 30.

Jefferson County Commissioner Jim Carns, a Republican who oversees the county's sewer and environmental operations, said the talks had resumed but declined to specify participants or other details.

"The negotiations now include many elements of plans that have been on the table since March," Carns said in an interview.

Riley, who entered talks last week at the county commissioners' request, said on Friday the county wanted to swap its existing variable-rate sewer bonds with fixed-rate bonds with longer maturities.

Creditors, which include Bank of America Corp and JPMorgan Chase & Co, agreed to respond to the county's proposal this week, according to Riley. A spokeswoman for Riley was not immediately available to comment on Tuesday.

Over the last several months, both sides have discussed such measures as raising sewer rates and tapping revenue from a 1-cent sales tax.

The lenders would be better off agreeing to restructure the debt, according to Carns.

"If they don't agree to a lower fixed rate of interest now, if the county is forced to declare Chapter 9, the creditors might end up with an even lower interest rate," Carns said.

Jefferson County originally sold the debt to pay for upgrades to its sewer system. The $3.2 billion of sewer bonds is made up of about $2 billion of auction-rate securities, $850 million of variable-rate demand notes and the rest fixed-rate bonds, according to Standard & Poor's Ratings Services analysts. The county so far has only defaulted on the insured variable-rate debt, which is being held by liquidity providers, they added.

Jefferson County's debt crisis began in early 2008 with the credit ratings downgrades of municipal bonds insurers. Those ratings cuts throttled auction-rate markets and dramatically increased interest costs for Jefferson County and many other issuers of auction-rate securities.

The interest on auction-rate debt resets through periodic auctions, typically held every seven, 28 or 35 days.

A bankruptcy filing by Jefferson County over its sewer debt would be the biggest by a U.S. local government since Orange County, California, filed for protection in December 1994.