NEW YORK (Reuters) - Creditors of Alabama’s Jefferson County were “very close” to reaching a deal with the debt-stricken county and were caught off guard when it filed for bankruptcy last week, the court-appointed manager for the county’s sewer system said on Thursday.
“The bankruptcy filing caught many of us by surprise,” John Young told a meeting of the Municipal Analysts Group of New York. “My team and the creditors all felt we were very close to a deal.”
Young was appointed by the court to manage the sewer system on behalf of creditors. The county’s $3.14 billion of sewer system debt lies at the heart of its financial problems.
Commissioners of Jefferson County, Alabama’s most populous county and home to its biggest city, Birmingham, voted on Wednesday, November 9, to file what ranks as the largest municipal bankruptcy in U.S. history.
“It’s hard to figure out exactly what happened.” Young told Reuters Insider after his speech. “We were very close to a settlement on Monday. We believed we had almost all the terms and conditions worked out.”
The county commissioners who voted for bankruptcy say that Young’s lawyer made new demands at a meeting the day before the bankruptcy was filed. Young was not present at that meeting.
“I was not sitting in the room with the commissioners or their lawyers, so I can’t tell you specifically what happened,” Young said. “We were all very disappointed and we were all very surprised.”
Young, former president of American Water Works Service Co., faces a court challenge on Monday to his continuing role. He was named in 2008 as a special master in Jefferson County and made receiver of the sewer system last year. The county commissioners voting for bankruptcy want him removed from the post.
Young pointed to one difficulty for negotiators: no single creditor group exists. The creditors are a diverse collection of entities such as JP Morgan Chase, other banks, bond insurers, hedge funds and individual investors.
A court hearing is set for December 15 on whether the county is eligible to file for Chapter 9, the section of the U.S. Bankruptcy Code that covers municipal bankruptcies.
Jefferson County’s sewer debt includes $850 million of variable-rate demand notes, $2 billion of auction-rate debt, with the remainder consisting of fixed-rate debt.
Young said without a deal with creditors, sewer customers are likely to see annual double-digit rate increases.
In court documents, Jefferson County said its sewer rates had more than quadrupled over the last 15 years and said further steep rate hikes would violate “reasonable” and “nondiscriminatory” provisions of Alabama law.
Insurance firms Assured Guaranty Municipal Corp. and Syncora Guarantee have both filed briefs with the court in support of Young. Financial Guaranty also filed a brief asking the court to hear its arguments.
Reporting by Chip Barnett in New York; Additional reporting by Karen Pierog in Birmingham and Michael Connor in Miami; Editing by Leslie Adler