Statement Regarding Revised Sewer Creditor Settlement

October 31st, 2013

As we have previously discussed, an unfortunate combination of events – including adverse market conditions, unseasonably cool, wet weather, and higher than anticipated capital expenses for the sewer system – imposed significant obstacles on the County’s ability to implement the global settlement that it negotiated with various sewer creditors and embodied in the chapter 9 plan the County filed on July 29, 2013.  These obstacles could have prevented the County from emerging from bankruptcy in 2013 despite overwhelming creditor acceptance of the plan.  The alternative would be lengthy and costly litigation with many creditors, all with highly uncertain results.

Due to a reduction in interest rates, the introduction of a senior/subordinate warrant structure, and improvement in the final financial projections from our utility consultant, we recently determined that the “hole” (or the “gap”) that needed to be filled by the sewer creditors should be approximately $50 million less than originally projected.

After several weeks of intense, around the clock negotiations, the County has obtained further concessions this week from the major sewer plan support parties that total $300 million.  Each of the major groups – including the bond insurers, the hedge funds, and the liquidity banks – has provided significant additional concessions, with JPMorgan once again bearing the lion’s share.  Obtaining these additional concessions did not come easily, and the creditors have reserved the right to recoup any contributions that prove unnecessary if market conditions improve by closing.  In other words, the $300 million in concessions (in whole or in part) will only be used as needed to “fill the hole.”

Based on information provided by our lead underwriter, Citigroup Global Markets, this additional $300 million in creditor concessions should be sufficient to allow the County to carry out a modified chapter 9 plan that will allow the County to exit bankruptcy by the end of this year, provided that the market does not experience further adverse changes.  Since the Commission concluded that the prior settlement with the County’s sewer creditors was fair, reasonable, and equitable, there is no doubt whatsoever that the modified settlement also meets those standards. 

Notably, the revised settlement does not include any further rate increases or other consideration from the County.  The Commission has already increased rates twice in the last 12 months and all parties negotiating on behalf of the County made clear that this Commission would not increase sewer rates beyond those contained in the resolution passed by the Commission on September 23, 2013.  Many of the sewer creditors tried to test our resolve on this and other issues, but we stood firm and made clear that all of the concessions necessary to address the hole in the transaction would need to come from the sewer creditors – and that is the result we have achieved.

The County looks forward to pursuing and obtaining confirmation of a modified version of its plan that incorporates the additional concessions, successfully issuing the new sewer debt necessary to carry out the plan, and emerging from the second largest municipal bankruptcy case in history by the end of the year.  If it is confirmed and goes effective, the County’s bankruptcy plan will provide significant and lasting benefits for every resident, ratepayer, and taxpayer in Jefferson County.

The resolution before you is intended to pave the way forward.  It first instructs counsel to rescind the notice of termination of the hedge fund plan support agreement that the County sent on October 17, 2013, and cancels the termination process begun by the Commission’s October 17th resolution.  The resolution further instructs counsel to prepare and finalize a modified chapter 9 plan and supplements to the existing plan support agreements.  The County’s lead underwriter has already begun the process of marketing the new debt, but the attorneys are going to ask that the confirmation hearing be continued from November 12th to approximately November 20th in order to allow sufficient time for marketing.

The resolution also provides for the approval of the Further Amended Financing Plan before you, which sets forth the terms of a modified new financing that includes the additional concessions obtained from the sewer creditors.  By way of comparison to the Amended Financing Plan the Commission approved on July 23, 2013, the aggregate principal of the new debt is approximately $1.738 billion, rather than approximately $1.977 billion or approximately $239 million less; and the net aggregate proceeds and payments to creditors, if all concessions are needed at closing, are approximately $1.701 billion, rather than approximately $1.850 billion or approximately $149 million less.    

All major sewer creditors provided the additional concessions needed to fill the projected hole.  JPMorgan agreed to a reduced recovery of $100 million less than they previously agreed to and to provide a 40-year letter of credit that will allow the County to avoid having to borrow to fund the debt service reserve – Citigroup estimates this concession alone adds about $140 million in value to the deal.  In terms of other concessions, the bond insurers will be providing approximately $40 million in the form of reduced recoveries and Assured Guaranty furnishing an insurance policy on $500 million of the new warrants.  The hedge funds will be receiving about $17.5 million less and the liquidity banks will be receiving about $2.8 million less than previously agreed to if needed to fill the hole.

Again, the sewer creditors may recoup all or a portion of the agreed upon concessions if they are not needed at closing, but they will receive no higher than their previous level of payment, if interest rates go down between now and closing as compared to the levels that existed in July.

In order to clarify the timeline, last Friday, County representatives held a settlement conference call with all of the major sewer creditor groups: JP Morgan, the bond insurers, the hedge funds and the liquidity banks. During this call, County bankruptcy attorney Lee Bogdanoff described in detail the required concessions needed from each group in order to proceed to confirmation.  The County also set a 5:00 pm deadline for each party to respond to the County’s request.  All parties responded before 5:00.  JP Morgan, the hedge funds and liquidity banks agreed to the County’s required level of concessions and the bond insurers asked for, and we consented to, another 24 hours for credit approvals and inter-company negotiations.  By Tuesday afternoon, we received word that they too had agreed to the County’s required concessions.  Yesterday was spent clearing up several legal issues concerning JP Morgan’s 40-year letter of credit.  Within minutes of these issues being resolved, this meeting was noticed.

In 10 days, this Commission will have been in office 3 years; in 9 days, this County will have been in bankruptcy 2 years.  Even though challenges remain, we now have the structure in-place to achieve our aggressive goal of exiting bankruptcy by the end of the year.  We can then begin to refocus our attention on economic development and job creation.

Originally read at the October 31, 2013 Finance & Information Technology Committee Meeting.