BIRMINGHAM, Alabama (Reuters) - Alabama’s Jefferson County is moving toward a negotiated settlement of a $3.2 billion debt crisis that could have triggered the largest municipal bankruptcy in U.S. history.
Talks are proceeding quietly among the county, its largest creditor JP Morgan (JPM.N) and other banks, as well as bond insurers. The discussions have led to optimism about a deal to focus on a big reduction of the debt principal, county commissioners said.
As a result, chances the county could declare itself bankrupt -- a rare occurrence for a local government -- have dramatically receded, they said.
Commissioners talk of a deal involving repayment of between $1.2 billion and $1.4 billion in debt -- or less than half the outstanding sum.
“Attorneys are talking and working and we feel that there is a good chance that we can have some resolution to this,” county commission president Bettye Fine Collins said in an interview.
The commission has yet to see a proposed deal and no resolution was imminent, she added.
JP Morgan declined to comment. In the past, the bank has said it favors what it called a “responsible solution”.
Jefferson County matters because its biggest city, Birmingham, is key to the southern state’s economy. If the county declares itself bankrupt it could hurt Alabama’s ability to attract investment and destabilize wider financial markets.
The county’s troubles are rooted in a move by commissioners last decade to refinance a sewer system upgrade with variable-rate and auction-rate debt and interest rate swaps. Corruption and fraud played a role in the refinancing.
Larry Langford, a former county commission president and Birmingham mayor, reported to federal prison on Wednesday to start a 15-year sentence as the highest profile convicted county official associated with those deals.
The interest payments on those deals spiraled out of control in February 2008 when bond rating agencies downgraded the debt.
Different parties have pursued talks with varying degrees of urgency since the crisis erupted. Analysts said several factors conspire to pave the way for productive talks:
* Three of the county’s four commissioners retire in November. A fifth stepped down in January. That could make them more likely to seal a deal in office before new, possibly more hard-line, commissioners enter.
* JP Morgan reached a $720 million settlement with the U.S. Securities and Exchange Commission in November over an unlawful payment scheme in the issuance of the debt. That deal is seen as strengthening the county’s hand in talks.
* A lawsuit the county filed against the bank that month could strengthen its hand. Creditors might wish to avoid a trial that could give a jury a free hand to award damages.
* A national recession has forced financial institutions to accept big debt reductions.
* The possibility that the county could add a second revenue stream through a new tax is effectively ruled out.
Publicly, commissioners have said little about the talks for fear of knocking them off balance.
Discussions pivot on three factors: the extent of debt reduction, calculations of interest payments for various debt components, and how far sewer rates can be raised to increase revenue needed to repay the principal.
The last point is sensitive because a deal to raise rates over time beyond inflation would be unpopular with voters and could violate federal guidelines, one commissioner said.
Collins said she would accept only a “minimal increase” in sewer rates, adding that to spell out a number for debt reduction would be “premature and irresponsible”.
Commissioner Sheila Smoot, who will step down, cited $1.2 billion as an “ideal” debt total. Commissioner Jim Carns argued the county could sustain a total repayment of only $1.2 billion to $1.4 billion given annual net operating sewer revenue stands at $103 million.
For creditors, talks hinge on the cost of debt reduction versus a prolonged crisis, given the county is not even repaying debt principal, said Andreas Rauterkus, a finance professor at the University of Alabama at Birmingham.
For the commission, an extra calculation is the desire to be seen as having rescued the county from ruin. “My legacy ... (among other achievements) would be that I saved the county from bankruptcy with my leadership,” said Collins.
That desire to cut a deal could push Jefferson into an agreement that was a mere “temporary fix”, said Carns, who has advocated using the threat of bankruptcy as a lever in talks.
As commissioners prepare to step down they are less likely to declare the county bankrupt. That could weaken their hand in negotiations, but it also opens a window for a deal.
Editing by Michael Connor, Andrew Hay