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Advances in Alabama: Largest Municipal Bankruptcy Case in U.S. Set to End

The largest municipal bankruptcy in the U.S. is finally set to end later this year after Jefferson County, Alabama filed a plan that will cut $1.2 billion in debt payments. The 101 page plan that forces some creditors to accept losses of over 70 cents on the dollar, will allow the county to pull itself out of bankruptcy by the end of the year if approved, although it’s unlikely that the county will not face huge obstacles in borrowing for years to come.

Making Headlines as the Largest Municipal Bankruptcy Case in the U.S.

In addition to overtaking  Orange County, California as the filers of the largest municipal bankruptcy in the U.S., this case also marks the first time that investors with municipal debt in the U.S. have been required to take losses on what is owed to them as part of a bankruptcy case. In Jefferson County, only a fraction of the $4.2 billion debt will be paid in full, with creditors getting back less than $100 million combined. In contrast, Orange County investors were paid in full at the conclusion of their 1994 bankruptcy case despite originally listing more debt than Jefferson county in its petition. In that case, lawsuits against the financial firms that had invested resulted in the sum being cut significantly in the early stages of the case.

Jefferson County’s bankruptcy was partially a result of a sewer refinancing project for more than $3 billion that was touched by political corruption. However, the county also missed payments on several other things, including bonds backed by taxes. After three years of negotiations that failed to yield a settlement to pay the county’s debt, Jefferson County was forced to file for bankruptcy in 2011.

Political Corruption

Bribery - Advances in Alabama: Largest Municipal Bankruptcy Case in U.S. Set to End

The plan filed to end the case, which must be approved by both creditors and the U.S. Bankruptcy Judge overseeing the case, stems from a large settlement made in May with the county’s largest creditors to split around $1.84 billion of the $2.4 billion they are owed collectively. Of the group, which includes seven hedge funds and a group of bond insurers, JP Morgan Chase & Co. took the cuts hardest, with the plan filed in U.S. Bankruptcy Court arranging for it to collect just $375 million of the $1.22 billion it is owed. The settlement was not JP Morgan’s first with Jefferson County, however, and they have lost even more over the course of the case because of the company’s ties to payments to people tied to county politicians allegedly made by bankers to win business.

Losses and Gains

Over $3 billion of sewer related debts, linked to sewer fees too low to cover payments or interest on the project, will only be partially repaid. To compensate for the debt, the plan asks residents to overlook the steep cuts to services and layoffs of hundreds of municipal workers and pitch in. The settlement aims to raise sewer rates in Jefferson County by almost 7.5 percent for the next four years, after which they would begin to rise annually by about 3.5 percent, a big increase for county residents who are already suffering.

Not everyone is suffering equally, however. Hedge funds will collect over 80 cents on the dollar for the $872 million they are owed, in exchange for the promise that they will help with refinancing so that the county can raise the money it needs. The bond and warrant holders that are owed about $95.5 million will be repaid in full.

Road to Recovery

The plan to settle the case marks the end of over 18 months of court hearings about what the municipality can afford to pay on the debts that it incurred. There will be a hearing on August 6 for final approval, and if accepted, the county will start refinancing, raise sewer rates, and plan to exit bankruptcy before 2014.