Statement Concerning Notice of Sewer Plan Support Agreement Terminations

October 18th, 2013


Statement Concerning Notice of Sewer PSA Terminations

October 17, 2013

As all of us know, the Confirmation Hearing on the County’s Plan of Adjustment  is currently scheduled to begin on November 12. 

The Plan requires that the County sell new sewer warrants sufficient to pay the existing sewer creditors approximately $1.835 billion.  This Plan was based on expert financial advice concerning projected interest rates.   Unfortunately, due to events far beyond the County’s control – including but not limited to uncertainly over the Federal Reserve’s policies going forward, the federal budget  and debt crises, Detroit’s bankruptcy and Puerto Rico’s debt problems – the interest rates on federal treasuries in general, and municipal issuances in particular, have gone up significantly since the Commission adopted its Financing Plan.  The bottom line is, that as we sit here today, the expected blended interest rate for the County’s new sewer warrants is much higher than was the case this summer when the Plan was adopted.

As we have said before, this County is not going to borrow a single dollar to exit bankruptcy without first obtaining independent expert advice that the County can afford to pay with reasonable, non-discriminatory  sewer  rates what it borrows.  The information we  have received from our sewer rate and engineering experts indicates that the costs of maintaining and preserving the Jefferson County sewer system continues to be much higher than John Young, the sewer receiver, projected, and revenues derived from industrial sewer charges are significantly lower than Mr. Young projected.

As a result, these factors – higher interest rates, a more costly system and lower industrial sewer charge revenues – when combined make it apparent to me that if the County were to go to the market today, the County would only be able to borrow approximately $350 million less than was anticipated when the revised Plan of Adjustment was adopted in July.  In other words, while the Country would pay the same total dollars on the new sewer warrants, a greater portion of the payments would go toward interest, less would go toward principal, and the cash proceeds derived from that financing at closing would be approximately $350 million less than is set forth in the Plan of Adjustment.  What this means is that the County’s Plan of Adjustment is currently not feasible unless the sewer creditors take less or make other concessions to allow the County to otherwise “fill the hole.”

Since the County is not borrowing for the new sewer warrants today, and since the market continues to change daily, the actual amount of the hole may grow larger or smaller depending on where interest rates are on the day the County attempts to sell the new sewer warrants into the marketplace.  It is my firm belief that the County cannot ask Judge Bennett to confirm our current Plan of Adjustment unless the hole, based on our best estimates today, is filled by the creditors. 

One thing is abundantly clear:  the citizens of Jefferson County who use the sewer system have done their part.  In review, this Commission increased sewer rates last fall, approved a long term rate schedule this past June and revised it in July consistent with our commitments in the Plan Support Agreements.  This schedule not only implements another sewer rate increase next month, it also contemplates additional increases over the next four years and beyond, provided that the Plan of Adjustment goes into effect  this year.  We gave these approvals in order to implement the compromises we reached with creditors in order to exit bankruptcy this year.

Make no mistake about it: There is great value to the County and its citizens in getting out of bankruptcy this year, in terms of promoting economic growth and in building a better tomorrow for our citizens, their children and their grandchildren.  But, the customers of the sewer system are already being required to sacrifice enough; they have no more to give.

We have told the County’s sewer creditors who are parties to Plan Support Agreements that the financial responsibility for filling the economic gap created by these events is theirs.  In fact, I met separately with representatives of JP Morgan, the monoline insurers and the liquidity banks last week in New York to deliver that message personally in face-to-face meetings.  All of the sewer creditor representatives with whom I have met have responded constructively and I am hopeful that the sewer creditors will act promptly in their own self-interest to fill the hole that exists today.  I say their self-interest, because if this Plan collapses, the creditors will be looking at months, if not years, of delay in resolving a problem that has been lingering for more than 5 years.

I should note that I am particularly disappointed that to date the hedge funds, who have bought nearly $1 billion of our sewer debt – in many cases at deep discounts – have been unwilling to even meet with us face-to-face to discuss the foregoing issues. 

As we sit here today, however, I am confident that the County cannot, in good conscience, ask that the Bankruptcy Court  confirm the County’s current Plan of Adjustment without receiving approximately $350 million in additional concessions from the creditors.  The time, therefore, has come for the County to take the action that it is entitled to take under its Plan Support Agreements: sending notices to the sewer creditors that we intend to terminate their Plan Support Agreements unless an acceptable level of concessions is forthcoming in the next  two weeks.   The termination notice will start a clock:  If creditors do not act to fill the hole by the end of the month, then the County will give  second notices to the sewer creditors on November 4, the terminations will become final, and the County’s Plan of Adjustment will be withdrawn from Bankruptcy Court.

I want to make it clear that during the next two weeks the County will continue to move forward with the Plan, on the assumption that the sewer creditors will decide to fill the hole.  But, if they don’t, I am confident this Commission will expeditiously move in another direction to get this County out of bankruptcy as soon as legally possible. 

In closing, I want to note that some sewer creditors, in times past, have underestimated this Commission’s resolve to act decisively.  It would not be prudent for them to make that mistake again.