Lenders mulling new offer in Alabama debt standoff

By Melinda Dickinson

BIRMINGHAM, Alabama (Reuters) - Alabama's Jefferson County and lenders pulled back from the brink of a threatened bankruptcy filing on Friday after the county proposed restructuring $3.2 billion of soured sewer debt.

Alabama Gov. Bob Riley, who this week entered the months-long talks, said in a news release that the county, which is home to the state's largest city, Birmingham, will be presented with a stand-still agreement against default through September 30 and that negotiations with lenders will restart next week.

A current stand-still agreement, which gives the county more time to negotiate, had been due to expire on Friday, and its expiration might have triggered what could have been the largest municipal bankruptcy filing in U.S. history.

"The county presented a proposal that provides for a restructure of the existing bond debt at lower, fixed interest rates over a longer term," Riley, a Republican, said. "Creditors received the proposal and agreed to respond next week."

The immediate issue among bond holders, insurers and the county turns on about $850 million of notes with interest rates that reset periodically and that defaulted earlier this year. The notes are held by banks, including Bank of America Corp and JPMorgan Chase & Co.

Bank of America had no immediate comment. JPMorgan Chase could not be immediately reached for comment. Several other lenders and insurers involved were either not available to comment or declined comment.

There is also about $2 billion of Jefferson County auction-rate sewer debt outstanding, with the rest of the $3.2 billion comprised of fixed-rate debt, according to Standard & Poor's.

"It's very positive if the county comes up with a solid plan and prevents bankruptcy," said Matt Fabian, a managing director at Municipal Market Advisors in Concord, Massachusetts. "All of the (debt) issuers in the state will suffer with higher yields if Jefferson County has to file for bankruptcy."

Jefferson County originally sold the debt to pay for upgrades to its sewer system, and its debt crisis began in early 2008 with credit ratings downgrades of municipal bonds insurers. Those ratings cuts throttled auction-rate markets and dramatically increased the 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. That market seized up in February after Wall Street brokerages stopped supporting the debt, and investors demanded much higher interest rates from debt issuers.

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.

Such a filing, a rarity by a local government, would also make Jefferson County the latest casualty of the global credit crunch, hit by its exposure to the auction-rate securities market.

Jefferson County's sewer financing was also dogged by local scandal. The U.S. Securities and Exchange Commission sued three people, including Birmingham's mayor, for alleged fraud in connection with interest-rate swaps tied to the bonds.

The SEC alleged that Birmingham Mayor Larry Langford took more than $156,000 from bond dealer William Blount while Langford was president of the county commission after steering swap agreements in 2003 and 2004 to Blount's firm.

Riley, in his terse written statement, said: "The tone of the meeting was positive and constructive, and I remain willing to facilitate further progress towards a solution."