Jefferson County muni default could be largest in history
If bond holders and Jefferson County, Alabama officials cannot come to an agreement, the county will soon have the dubious distinction of being the largest muni default in the history of the United States.
That default would pale of course in the face of a default by the U.S. government, which I still doubt will happen. Still, the Jefferson County situation is worth noting as it just might set the tone for other work outs later this year. The latest, according to the WSJ, is an offer that would ask creditors to forgive about $1 billion of the $3.14 billion in sewer debt owed by Alabama's most populous county. That's a huge haircut. In fact, it would be among the largest ever. But the economy has sunk to the point at which this sort of deal is a legitimate option.
It makes a lot of sense on the surface. The offer has been characterized as a last-ditch effort to prevent an outright default. We'll likely see banks and hedge funds agree to something in this ballpark, though there are lots of other issues on the table. Apparently, JPMorgan Chase--which previously settled charges of fraud related to this sewer debt by agreeing to pay more than $700 million--has agreed to shoulder the bulk of the losses. Bondholders want insurance companies to kick in as well. My sense is that we'll get a deal, perhaps soon.
One issue is whether other issuers will decide to walk this road. Not that Meredith Whitney was right on, but there are quite a few municipal issuers out there that would love to re-negotiate their debts. Some may be at the point where they have to inn order to prevent a default. Seeing deals such as this one just might embolden them to get the process going sooner rather than later.
- here's the article