BRADENTON, Fla. – Jefferson County, Ala.'s 2013 sewer system debt remains at junk levels as the county's post-bankruptcy plan works as intended so far, Fitch Ratings said.
Fitch affirmed its ratings of BB-plus on the county's senior sewer warrants and BB on the subordinate lien warrants on Nov. 17. The outlook is stable.
Jefferson County sold $1.8 billion of back-loaded warrants in Dec. 2013, and used the proceeds to pay creditors holding $3.14 billion in old sewer debt.
The deal shed $1.4 billion of outstanding debt and provided significant debt service payment relief in the early years, said Fitch analyst Kathy Masterson.
"The county's 2014 audit indicated a return to financial sufficiency of the sewer system," Masterson said. "As a result, full debt service was paid and all-in [debt service coverage] was healthy at 1.8 times."
Sewer system cash flows are sufficient to generate healthy all-in debt service coverage of at least 1.6 times, and meet capital demands through 2023.
In 2024 and beyond, coverage is projected to be modest at around 1.25 times as a result of back-loaded debt service, which will provide insufficient remaining cash flow to support known capital needs, Fitch said.
"System debt levels are exceptionally high, even with the substantial reduction in system debt achieved by the exit from bankruptcy in 2013," Masterson said. "Further, the very slow pace of debt amortization and use of capital appreciation warrants will result in an elevated debt burden for decades even without additional borrowings."
An approved sewer system rate structure includes annual adjustments through final maturity of the warrants in 2053, and the County Commission's support to implement rate increases or additional adjustments to meet the rate covenant is key to the ratings, Fitch said.
"The rating is unlikely to move upwards given the long-term capital demands of the system, back-loaded debt, and rate sensitivity" beyond increases in the approved rate structure, Masterson said.
Since the county emerged from Chapter 9 bankruptcy in December 2013, litigants have appealed. The district court has ruled that the appeal is not moot, and has said that it would review provisions in the debt adjustment plan that allow the bankruptcy court to maintain jurisdiction to ensure that sewer rate increases are implemented.
The county is challenging the district court ruling before the 11th Circuit Court of Appeals in Atlanta.
Fitch said it views the ongoing community discord and legal challenges regarding the rate structure as concerns to the county's credit quality.
In April, Standard & Poor's affirmed its investment grade BBB ratings on Jefferson County's senior-lien sewer warrants and its BBB-minus ratings on the subordinate warrants. The outlook is stable.
S&P said its ratings reflect the lingering impact of the county's bankruptcy, including ongoing legal disputes.
Retention of the current ratings will depend on numerous factors, including compliance with the adopted rate resolution, S&P said.
