Bankrupt Alabama County Agrees to Tentative Deal With Creditors

By John Clark
Jefferson County, Alabama, the largest municipality to file for bankruptcy in American history, may be able to leave bankruptcy court soon, according to a report from the Wall Street Journal.
Sources indicate that J.P. Morgan Chase, the county’s biggest creditor, has tentatively agreed to a debt reduction deal that would save the county hundreds of millions of dollars.
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Jefferson County Inches Closer to Bankruptcy Exit
Sources say Jefferson County, which made a series of poor investment decisions in an effort to upgrade its aging sewer system, may soon be able to regain its financial footing, thanks to some timely debt relief in bankruptcy court.
According to reports, the county has agreed in principle to a deal with its creditors, who are collectively owed roughly $3 billion in debt, most of which is tied to the municipality’s crippled sewer system.
The proposed bankruptcy plan would allow Jefferson County to unload $1.2 billion worth of debt. In addition, a group of hedge funds and private equity firms have agreed to help refinance the rest of the debt.
Interestingly, sources note that the gamble by the investment groups may represent a historically large bet on a municipality. But the groups were willing to gamble that Jefferson County will eventually be able to repay the debt.
Residents of Jefferson County, however, may feel a bit of pain. Over the next four years, local sewer rates will increase at an annual clip of seven percent, according to sources.
The bankruptcy exit plan will be reviewed by a federal judge later this week, but sources do not expect the county to officially exit bankruptcy until the end of 2013.
Investment Firms Take Big Gamble on Municipal Debt
Sources emphasize that the investment groups who purchased roughly $900 million worth of debt could stand to make significant gains from the deal. But they could also take a massive loss.
The county, however, is thrilled with the arrangement. According to Kenneth Klee, Jefferson County’s bankruptcy attorney, the proposed plan would cost $200 million less than the last proposed refinancing deal, which was offered in 2011.
According to reports, the proposed deal required months of intense negotiations between investment firms, insurers, and officials representing the largest county in Alabama.
And the hero of the deal may be J.P Morgan Chase, which reportedly agreed to forgive about $842 million in debt. Of course, the plan has not yet been finalized, so residents of Jefferson County would be wise to wait before celebrating a bankruptcy exit.