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It appears that Jefferson County, AL has averted a chapter 9 bankruptcy filing. If it has been averted, the terms for bondholders were steep: a 35 per cent haircut ($1.1 billion on $3.14 billion of sewer bonds, with JPMorgan providing $750 million of that) and crossed fingers that the state of Alabama would create a new bond issuing entity.
I say “appears” because this agreement, passed by the County Commission on a 4-1 vote, is contingent on the following:
- Governor Robert Bentley must call a special session of the Alabama legislature.
- The special session must be persuaded to create an independent sewer authority with the power to issue new bonds.
- This independent authority must be backed by a “moral obligation” pledge from the state.
- The Alabama legislature must also cure Jefferson County’s general fund deficit.
All this and a 35 per cent haircut, and I am receiving emails today crowing that this development proves the underlying health of municipalities?
Whatever happened to the much-hyped ability of local governments to generate the incremental revenue necessary to satisfy their debts? Jefferson County has had one attempt to do so struck down by the Alabama state court and the issue of the size of sewer-rate increases was a major point of contention between debtor and creditors throughout this situation.
Perhaps the $750 million JPMorgan just saw evaporate was not much of a surprise to the firm. After all, in May CEO Jamie Dimon predicted that we could see a hundred municipal defaults. Fascinating how little pushback Dimon and Nouriel Roubini got for their bearish municipal calls, while Meredith Whitney has turned into a piñata for having the temerity to point out that as a class, municipalities are facing the kinds of stress that tend to lead to defaults, and daring to put a number on that call.
We are in the very early stages of what is likely to be a long, slow process of restructuring in the municipal space. Politicians will grandstand, unions will raise the decibel level, bondholders will do their best to remain ignorant of political realities, but in the end many local governments across the country will come to the conclusion that they have unsustainable liabilities and drastic action must be taken.
Many thanks to Frank Pecarich, who is laudable for the energy and enthusiasm with which he pursues the thesis that I am dead wrong.