Deadline seen spurring Jefferson Cty legal moves

By Melinda Dickinson

BIRMINGHAM, Alabama, Aug 25 (Reuters) - Alabama's debt-laden Jefferson County, facing the expiration on Friday of a stand-still pact with lenders, is preparing to take steps to protect the county, the head of the County Commission said on Monday.

Jefferson County President Bettye Fine Collins stopped short of saying that a Chapter 9 municipal bankruptcy filing was coming, but she sketched a gloomy outlook for the county's six-month campaign to hammer out a deal with Wall Street banks to resolve the debt crisis.

Jefferson County ran up $3.2 billion in sewer-system debt through costly bond swaps over a period of years. If the county -- the home to Alabama's largest city, Birmingham -- goes bankrupt, it would be the biggest municipal bankruptcy in U.S. history.

Collins on Monday said there was no new plan in the works that does not require a special session of the state legislature to be convened.

That leaves two options: concessions from Wall Street lenders or a Chapter 9 municipal bankruptcy filing by the county.

"Wall Street is not making any offers to work with the county, but this does not necessarily mean we will be in default," Collins told reporters. "We will, however, authorize our attorneys to begin proceedings to protect the county."

Those proceedings will almost certainly lay groundwork for the lengthy process of filing for Chapter 9 bankruptcy, though Collins stopped short of saying a Chapter 9 filing was coming.

Commissioners of the county are split over how to tackle the towering debt accumulated over years through variable-rate and auction-swap bonds issued to cover a federally mandated sewer repair program.

A forbearance agreement between Jefferson County and bank lenders reached last month, but contingent on a special legislative session being called, expires on Friday.

Gov. Bob Riley, who has been meeting privately with the county commissioners, has declined to summon the state legislature into a special session to pass laws central to a proposed restructuring of Jefferson County's sewer-system debt.

County commissioners Bobby Humphryes and George Bowman have yet to meet with the governor, but both expect to speak with him on Monday or Tuesday.

Bowman said he will listen to Riley's comments out of respect, but he still does not consider bankruptcy a viable solution to the crisis.

Bowman said he believes concessions can still be won from lenders and hopes that, in spite of a local groundswell of support for Chapter 9, "cooler heads will prevail and a plan will present itself."

In the last two weeks, the hometown Birmingham News has urged in an editorial that Jefferson County move toward a Chapter 9 bankruptcy filing. Such a step might kick-start the negotiations that have been bogged down for months, the state's largest newspaper said.

Local mayors have also backed a bankruptcy filing, if talks with lenders flounder.

In addition, the head of the Retirement Systems of Alabama, David Bronner, recently repeated an offer that, if a deal with lenders can be reached, his group would buy the county out of Chapter 9 bankruptcy for slightly over 50 percent of its current debt. That would leave over $1 billion owed to bondholders unpaid. (Writing and additional reporting by Michael Connor in Miami; Editing by Leslie Adler)