Commission Announces Important General Obligation Debt Settlement

May 17th, 2013

Yesterday, the Commission approved a Plan Support Agreement (PSA) for the 2001-B General Obligation (GO) Warrants. It reflects a negotiated settlement by and between the County and the two holders of the 2001-B GO warrant debt, JPMorgan and Bayerische Landesbank.

The 2001-B GO warrants represent about $105 million of the County’s debt. The proceeds of this debt paid for improvements to the County’s infrastructure dating back over many years. This debt has nothing to do with the County’s sewer system.

This PSA solves a major problem for the County. Before the County filed for Chapter 9 bankruptcy protection, this series of warrants had been accelerated, resulting in the full $105 million being due and payable. There was no way the County could pay back this amount in a lump sum on the filing date, today, or on the effective date of our exit from bankruptcy. As such, the restructuring of this debt was a necessary part of the County’s bankruptcy exit strategy.

This agreement effectively “resets” the 2001-B debt by putting it back on its original amortization schedule (prior to the pre-bankruptcy acceleration) through April 2021. Not only does it eliminate the default, it does so in a way that fits with the scheduled amortization of the 2003 and 2004 GO warrants.

This agreement also includes a waiver of claims for default rate interest and professional fees that exceed $2 million, which in the absence of an agreement could have been due from the County. This agreement also includes a waiver of claims for more than $10 million of “post-petition interest.” There would have been a significant legal confirmation issue (including on appeal) regarding whether these creditors had a right to such interest. This agreement eliminates the need for that litigation without the County paying anything on account of post-petition interest.

This agreement also favorably fixes the post-bankruptcy interest rate. First, it converts floating rate debt (which has been a problem for the County) to fixed rate debt. Second, the interest rate formula is favorable — if calculated today, the interest rate would be fixed at 4.9%. Reaching a settlement on this issue also avoids another legal confirmation fight about the appropriate post-bankruptcy rate.

This settlement covers only the Series 2001-B GO warrants and is subject to reaching a satisfactory agreement with JPMorgan regarding the sewer debt. The treatment of the Series 2003 and 2004 GO warrants depends on the outcome of ongoing negotiations with National Public Finance Guarantee Corporation, the insurer of those warrants.

Overall, the announced settlement is an important step toward a consensual and confirmable bankruptcy plan, since it locks up a significant piece of the County’s debt structure on terms acceptable to the County.