Bonds News

Alabama officials see debt talks clouded by Wall St crisis

BIRMINGHAM, Alabama (Reuters) - Wall Street’s rolling crisis that caught two more leading municipal bond underwriters over the weekend may slow negotiations on restructuring $3.2 billion of troubled debt issued by Alabama’s Jefferson County, local officials said on Monday.

The county, Alabama’s most populous, has been in talks for more than half a year with creditors over its sewer bonds and related interest-rate swaps. It has authorized lawyers to prepare for a possible municipal bankruptcy filing.

With the help of Alabama Gov. Bob Riley, both sides are working against a September 30 deadline to reach agreement and avert what would be the biggest municipal bankruptcy filing since that of Orange County, California, in 1994.

“It’s not good news on Wall Street,” Jefferson County Commissioner Bettye Fine Collins said in an interview. “I don’t know yet what its impact will be on Jefferson County, but it’s not good for the economy, or anyone else.”

Over the weekend, Lehman Brothers Holdings Inc LEH.N, the No. 3 underwriter for competitive deals in the $2.6 trillion tax-free debt market, filed for Chapter 11 bankruptcy protection while No. 1 competitive issuer Merrill Lynch & Co Inc MER.N agreed to a $50 billion takeover.

Within the last six months, two other major dealers stepped back from the muni market. Bear Stearns & Co. was acquired by JPMorgan Chase & Co JPM.N and UBS Securities UBSN.VX dissolved most of its municipal operations in June.

Lehman was involved in Jefferson County swap agreements, along with Bear Stearns and JPMorgan. Merrill was paid approximately $40,000 for one month’s work for the county on a proposal for restructuring the debt.

Another commissioner, Shelia Smoot, said the bankruptcy and merger just added to the need for a quick resolution.

“We have to play hardball with Wall Street before someone else folds. The lenders may be busy trying to save themselves, but it’s our job to get ahead of all this,” she said in an interview.

“Everything that happens on Wall Street has a trickle-down effect on us,” said a third commissioner, Jim Carns. “The governor has asked us to play our cards very close to the vest, but there has been no change in the status of negotiations yet from last Wednesday.”

Creditors, insurers and lawyers for the county met for two-and-a-half hours last week. Talks appear to be centered on an August 29 proposal made by the county and were to continue, but no new dates for bargaining have been announced.

The county’s $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.

Additional reporting by Michael Connor in Miami; Editing by Dan Grebler