Jefferson County Avoids Default With Extension Agreement
Jefferson County, Alabama reached an agreement for an extension with it’s creditors late Friday to avoid default. It has nearly $3.2 billion in outstanding debt for it’s sewer system and had stopped making payments when their interest rates more than doubled back in March.
The county — threatened by the biggest municipal bankruptcy in U.S. history — avoided missing an Aug. 1 deadline to pay $100 million in interest on the debt thanks to the extension, according to county commission President Bettye Fine Collins.
“The extension of the deadline gives Jefferson County a chance to fine-tune a plan that will keep us out of bankruptcy and court,” Collins told the meeting.
Bond markets have been in turmoil ever since a number of insurers lost their top credit ratings which sent prices tumbling and yields soaring for all the debt they guaranteed. Jefferson is just one of the many municipalities who are struggling with their debt issues as financial markets have gone haywire in the wake of the subprime collapse.
The county refused to pay the higher costs were associated with interest rates that kicked in when investors shunned the auction rate bond market and investment banks who act as brokers refused to buy up the securities to keep the auctions from failing. In normal times auction rate bonds became popular because it offered communities essentially short term money market rates for long term debt but when auctions failed, interest rates shot up to over 20% in many cases.
Investment banks and bond insurers are facing numerous lawsuits stemming from ratings downgrades due to their risky involvement with residential mortgage securities and other Collateralized Debt Obligations. Although the new extension gives Jefferson County until Nov. 17, it is seriously considering declaring for bankruptcy protection as it has very few options to meet it’s overwhelming sewer debt.
One can’t help but have sympathy for Jefferson and other communities who are now faced with paying hundreds of millions in higher interest payments through no fault of their own.
