Wednesday, June 29, 2011

Whoa There JeffCo!

Jefferson County authorities have stepped up the rhetoric in there battle against their sewer system's creditors. The line goes something like take a 30-60% haircut or we will make you in bankruptcy. Those are empty threats.

First off, while the court would likely find the county insolvent - a prerequisite for a chapter 9 plan - that determination would apply principally to the general fund and its obligation. Sewer bonds would undoubtedly retain their secured claim on sewer system revenues. Beyond normal contractual legal security, Amendment No. 73 to the Alabama Constitution forbids system revenues being used to pay general expenses of the county. If the horse isn't dead yet, we can further beat it with this excerpt from the 2001 warrant's official statement: "Thus, an automatic stay under Chapter 9 would not be effective to prevent payment of principal and interest on the Series 2001-A Warrants from the Pledged Revenues." As to this topic, th-th-th-that's all folks!

Then the next topic, the threat of bankruptcy thwarting rate hikes is a non-starter. Using bankruptcy to impair revenues is contrary to the principals of the bankruptcy process. Patients do not undergo open heart surgery to have cholesterol stuffed into their healthy pulmonary arteries. The county's rate covenant will remain in effect and the sewer system's receiver and that receiver's order to meet obligations will remain in effect. This is out of the scope and contrary to the essentials of a bankruptcy proceeding.

But there's more. The persistence of the county's short-sighted and feeble attempts to disavow obligations of the sewer system (that they lost control of) have not gone unnoticed. Recently, analyst including the eminent guru Matt Fabian of MMA have recommended investors avoid the whole state. Fabian was mentioned in the WSJ on 6/21/11:

"One leading analyst, Matt Fabian of Municipal Market Advisors, advised investors to shy away from all Alabama bonds, citing the state's unwillingness to help Jefferson County as it grapples with $3.2 billion in debt from a soured sewer bond financing and the loss of a jobs tax, a crucial revenue source."

This apparently caught the attention of Governor Robert Bentley who pledged his support for the county just this week. All of sudden we realize that a diet of oatmeal and plants can save us all the pain of having our rib cage sawed opened. In this case, the blood is going to keep flowing either way, one way is just cleaner, pleasanter, and safer.

The 5% of 20s are yielding about 8 and a quarter. The market says these are not in serious danger of a 60% or 30% haircut. And that is what we say too.

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