In response to our recent article on the Jefferson County bankruptcy, a reader asked “What and how much will be the settlement? Who pays and who gets the pain?” My colleague Michael Brooks replies below.
It is far too early to predict the size of the Jefferson County settlement and whose ox will end up being gored. Nevertheless, there are some clues to the likely outcome of the largest municipal bankruptcy in US history.
Just before Jefferson County, Alabama, filed for bankruptcy, it was close to reaching a settlement on its $3.2 billion of defaulted sewer debt—the lion’s share of the county’s total debt. The county was seeking about $1 billion in concessions from sewer bond holders; it planned to refinance the rest. Most of the concessions would have come from J.P. Morgan, the largest bondholder, with $1 billion of sewer debt. A far smaller piece would have been absorbed by bond insurers. Individual bondholders might not have been affected.
Unfortunately, negotiations on the settlement reached an impasse related to who would absorb losses on the remaining $140 million of sewer bonds. The other major sticking point to the settlement was the inability of the Alabama state legislature to reach consensus on how to address the county’s general fund budget woes.
Aside from the sewer bonds, Jefferson County has about $1 billion in debt. The bankruptcy negotiations will have to deal with the county’s $310 million of general obligation debt. We believe the county’s $814 million of school warrant debt will be protected in municipal bankruptcy.
It’s still unclear what will happen to bondholders, but the pain is already being felt by county employees: 500 have been laid off and many others are on indefinite unpaid leave.
The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Douglas J. Peebles is Chief Investment Officer and Head of Fixed Income and Michael Brooks is Senior Portfolio Manager—Municipal Bond Management, both at AllianceBernstein