Bonds

Jefferson County, Alabama’s $2.5B sewer deal proceeds without Citigroup

Jefferson County, Alabama, plans to return to the municipal bond market next month with a $2.5 billion sale of tax-exempt revenue warrants for its sewer system after a late change of lead managers.

Citigroup is no longer book-running manager on the deal, according to a resolution drafted by the county Tuesday, less than a week after Citi announced it will close its municipal bond division early next year. Bloomberg News reported the county will formally vote to adopt the resolution on Thursday.

Citigroup had been in a lead role in the preliminary official statement and online investor presentation published Dec. 14 on munios.com.

The Jefferson County Courthouse in Birmingham, Alabama. The county is planning a $2.5 billion sale of sewer revenue warrants to refund the debt it used to exit bankruptcy.

Bloomberg News

Raymond James & Associates would be bookrunner on the $2.545 billion issue of Series 2024 sewer revenue warrants, according to the draft resolution.

The Series 2013 warrants were issued as part of the county’s Chapter 9 bankruptcy exit.

They reached their 10-year call date in October and are being refunded in their entirety, according to the investor presentation. Proceeds from the sale, along with other county funds, will be used to refund the outstanding warrants for savings and to create a more level debt service structure.

Jefferson County filed for Chapter 9 bankruptcy in November 2011 after defaulting on $3.14 billion of sewer debt. The largely variable-rate and auction-rate sewer debt portfolio and related swaps had become entangled in the larger 2008 financial crisis. Before the filing, a lawsuit also struck down an occupational tax that was a major source of county funding.

The county emerged from bankruptcy in December 2013, after issuing the $1.8 billion in 40-year sewer refunding warrants to write down $1.4 billion in related sewer debt.

Citi priced the 2013 deal, which was partly insured by Assured Guaranty Municipal.

It was composed of Series 2013A senior lien sewer revenue current interest warrants; Series 2013-B senior lien sewer revenue capital appreciation warrants; Series 2013-C senior lien sewer revenue convertible capital appreciation warrants; Series 2013-D subordinate lien sewer revenue current interest warrants; Series 2013-E subordinate lien sewer revenue capital appreciation warrants; and Series 2013-F subordinate lien sewer revenue convertible capital appreciation warrants.

In 2017, the county returned to the bond market, selling $339 million of education revenue warrants in a refunding backed by a 1% local sales tax. In 2018, the county again tapped the market, selling GO refunding warrants in a deal that saw more than $800 million in orders from investors.

The Series 2024 issue is tentatively structured as serials, due Oct. 1, with maturities running from 2024 to 2043 with term bonds in 2048 and 2053.

Under the new resolution, BofA Securities, Morgan Stanley and Stifel were named co-lead managers with Jefferies, Loop Capital Markets, Piper Sandler and Siebert Williams Shank as part of the underwriting group.

Public Resources Advisory Group and Terminus Municipal Advisors are the financial advisors. Balch & Bingham is the bond counsel and Bradley Arant Boult Cummings is disclosure counsel. Mauldin & Jenkins are independent certified public accountants.

Unlike the debt that is being refunded, the new sewer warrants will come with across-the-board underlying investment grade ratings; the deal is rated Baa1 by Moody’s Investors Service, BBB-plus by S&P Global Ratings and BBB by Fitch Ratings. Moody’s and Fitch assign stable outlooks to the bonds while S&P maintains a positive outlook.

The outstanding sewer warrants that the new deal will refund are rated an underlying BB-plus by Fitch and BBB-plus by S&P.

“Debt service under the series 2013 warrants was scheduled to increase about 50% in fiscal 2024 and to continue escalating at 3% annually through fiscal 2039, as a result of many of the 2013 warrants being structured as capital appreciation bonds. Under that structure, Fitch had previously expressed concern that annual cash flow may not be adequate to fund existing capital needs beyond fiscal 2024,” the rating agency said in its rating report.

The new debt “is expected to yield annual debt service savings in fiscal 2024 (FYE September 30) and beyond,” Fitch said. “While not entirely level debt service, the rate of annual increases is below the prior 3% annual increase and will contribute to improved cash flow generation.”

The Series 2024 warrants are limited obligations of the county payable solely from a pledge of the revenues — other than tax revenues — collected by the Jefferson County Sewer Enterprises, which is owned and operated by the county.

The sewer enterprise provides wastewater collection and treatment to 133,200 residential and 12,200 commercial customers in Jefferson County and parts of Shelby and St. Clair Counties.

The system covers 448 square miles and maintains 3,224 miles of sewer lines, nine water reclamation facilities, 177 lift stations, and 83,128 manholes. The system treats an average daily volume of 127 million gallons per day.

After the sale, the warrants will be the only debt associated with the sewer authority, which said in the investor presentation it anticipates no additional debt issuance for the next 10 years.

According to the county, its capital investment and maintenance strategy has improved the sewer system’s performance, as shown by a drop in sanitary sewer overflows.

Improvements to the system’s operations have also allowed the county to seek the termination of an U.S. Environmental Protection Agency consent decree.

The EPA filed a limited objection to the release on the condition the county pay certain penalties, which it did. The county said the EPA, the Alabama Department of Environmental Management and the U.S. Department of Justice have otherwise indicated they have no objection to its release from the consent decree, but the issue is not closed because a private plaintiff has objected to the county’s motion, the investor presentation said.

“The rating reflects the county’s stable operating and financial history following emergence from bankruptcy in 2013, with actual financial results meeting or exceeding the 2013 feasibility study expectations,” S&P credit analyst James Breeding said in a report.

S&P said supporting the rating were “a favorable economic environment anchored by the city of Birmingham; system operating fundamentals that demonstrate more than adequate treatment capacity and the completion of all consent decree construction projects; high sewer rates that will continue to rise and could strain affordability; financial projections that show better-than-adequate coverage.”

However, S&P noted that “the debt structure will require steady revenue growth, primarily generated through rate increases, to maintain adequate coverage but relatively low operating liquidity metrics; significant system capital needs totaling more than $1 billion in the next 10 years that management expects, and in our opinion needs, to completely address without the issuance of additional warrants; financial management policies and practices that set adequate financial and debt parameters and have been adhered to since the county’s emergence from bankruptcy.”

S&P said its positive credit outlook “reflects the potential for a higher rating should the county demonstrate a multi-year post-issuance track record of positive financial results that meet or exceed the county’s financial projections. Specifically, the commitment to continued rate increases absent the requirements under the 2013 Plan of Adjustment and the demonstrated ability to fund ongoing capital needs with what could be challenging capital market access, will be key considerations for a potential higher rating.”

Moody’s said its rating on the warrants “the sewer enterprise’s continuously satisfactory financial performance and debt service coverage, which is expected to persist. The rating further incorporates the large system size and growing customer base that includes the University of Alabama at Birmingham (Aa2/Stable).”

Moody’s added that its outlook “reflects the expectation that the enterprise will continue to maintain satisfactory debt service coverage due primarily to a willingness to increase rates on an annual basis. The outlook also reflects the expectation that leverage will remain highly elevated despite an absence of additional borrowing plans over the next 10 years.”

The county has been on a steadier financial path since it emerged from bankruptcy. It has implemented a performance-based budgeting system with emphasis on holding down labor costs while state law requires that commodities and equipment it buys be purchased through competitive bid.

An Investment Committee oversees the county’s investment policies and monitors its performance. The county employs an active investment policy that manages its exposure to market movements by limiting the average maturity in its investment portfolio to shorter maturities.

For pensions, 100% of the required contributions for current pension liabilities are funded annually by the county.

The county’s 2013 bankruptcy exit plan was contested legally for years after its implementation; one ratepayers case carried on until 2019, when the U.S. Supreme Court declined to take it up.

The preliminary official statement for the 2024 warrants notes that the bankruptcy court’s 2013 confirmation order, which effectively validated the 2013 warrants and indenture, “will not benefit or apply to the Series 2024 Warrants.”

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