Wall St. weighs Alabama debt offer

By Melinda Dickinson

BIRMINGHAM, Alabama (Reuters) - Wall Street financiers face no strict deadline on a proposal to restructure $3.2 billion of auction-rate and other debt from Alabama's Jefferson County and may respond by next week, a county official said on Thursday.

Creditors, county officials and Gov. Bob Riley, who last week stepped into negotiations that have been going on for months, on Friday made some progress in the standoff on reworking the debt that could have led to a Chapter 9 bankruptcy filing by Jefferson County.

A bankruptcy filing by Jefferson County, which is home to Alabama's biggest city, over its sewer debt would be the biggest by a U.S. local government since Orange County, California, filed for protection in December 1994.

Such a filing would also make the county the latest casualty of the global credit crunch, hit by its exposure to the auction-rate securities market. Municipal bankruptcies are rare in the United States and do not usually affect essential government services.

The county is proposing to bankers, bond insurers and other parties a swap of existing variable-rate sewer bonds for fixed-rate bonds with longer maturities, according to Riley.

"The county commission would like to see a response from Wall Street sometime next week but there is no hard deadline," said Jefferson County Commissioner Jim Carns, a Republican who oversees the county's sewer and environmental operations.

Particulars of the proposal were kept secret but the Birmingham News reported on Wednesday that the county wanted debt with lower rates and that a resolution would include no new taxes, no issuance fees and possible sewer fee hikes of as much as 2.85 percent a year. In addition, interest-rate swap agreements that have aggravated the debts would be eliminated, according to the newspaper..

County officials in Birmingham declined to comment on specifics in the report.

Many sewer-system customers, whose fees have risen by more than 300 percent in the last decade, had complained to county commissioners by phone, fax and email, officials said.

County officials and financiers remain in telephone contact and were occupied on Wednesday by how details of the proposal had leaked, according to county officials.

"I do not think the leak will impair negotiations in any way," Carns said in an interview.

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 remainder in 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.

Friday's talks also resulted in a promise of another stand-still agreement against default penalties that would expire on September 30. Several stand-still agreements have already been reached during the financial crisis that began in February.

(Writing by Michael Connor in Miami, Editing by Chizu Nomiyama,)