Anatomy of a deal: Jefferson County, Alabama's Southeast winner

Twelve years after filing what had been the largest municipal bankruptcy in history, Jefferson County, Alabama came to market with $2.24 billion of investment-grade warrants and received orders equal to 11.6 times par. 

"This is the ultimate turnaround story in the municipal market," said Matt Adams, managing director at Raymond James, one of the transaction's joint senior managers.

The county's January sewer revenue warrant deal won the Southeast category of The Bond Buyer's 2024 Deal of the Year awards.

But the county's success went far beyond overcoming a history of debt restructuring.

"The structuring of the issue involved the underwriters and municipal advisors working hand-in-hand with the county's sewer feasibility consultant to balance many objectives, including: moving all of the county's debt to current interest warrants, structuring the debt to completely revise indenture provisions in order to obtain investment-grade ratings without the use of bond insurance or other credit enhancement, structuring the debt around an innovative feasibility model producing a 10-year forecast of the county's operational expenses and capital expenditure needs (all of which would be paid for in cash and not debt), maximizing present value savings, and using these savings to level annual debt service," Adams said.

Still these objectives conflicted with each other, he added. Given that challenge, the transaction took more than two years to structure and complete, Adams said.

When the debt was being restructured as part of the 2013 bankruptcy exit, the county was in default and state courts ruled illegal a tax on county residents' pay that fed its general fund, said Matthew Arrington, president of Terminus Municipal Advisors, one the deal's municipal advisors.

"It was just a picture of gloom and doom," he said, because the county had to solve both the general fund and sewer fund problems simultaneously.

"The story of Jefferson County is one where we see an issuer's elected officials make some very hard decisions to help the county emerge as a financially healthy and stable issuer," Adams said. 

"Our mantra was to demonstrate to investors what we had done as opposed to relying on telling them what we would do," said Jefferson County Commissioner Joe Knight.

The 2013 warrants left the county with problems it knew it needed to overcome, said Jefferson County President Jimmy Stephens. The warrants included several capital appreciation bonds that were accreting rather than amortizing and, like most CABs, carried high interest rates. 

Annual debt service was scheduled to double in 2024, said Frank Long, partner for the bond counsel Balch & Birmingham. 

"We knew our 10-year call date was October 1, 2023, and we began working toward that date by digging out of a very deep hole created by our predecessors," Commissioner Knight said. "Over the years we revamped our county's finances, were very conservative in our approach and did everything we could to achieve our goal of getting the county out of the ditch."

In fall 2021, the commissioners started planning how they would refund the warrants, said Michael Dunn, managing director at Stifel, one of the deal's joint senior managers.

They brought in Galardi Rothstein Group to help create an innovative debt structure.

The county chose Stifel, Raymond James, and Citi to be the joint senior managers. In one of the deal's late breaking twists, Citi withdrew a few weeks before the deal came to market as it prepared to withdraw from municipal bond underwriting.

When Citi left, "Stifel and Raymond James really pulled their bootstraps and served the county well," Arrington said.

Along with Terminus, Public Resources Advisory Group served as municipal advisor. Deal co-managers were BofA Securities, Morgan Stanley, Piper Sandler, Siebert Williams Shank & Co., Loop Capital Markets and Jefferies.

"This transaction was a great collaborative effort," Arrington said. "There were no egos." He credited the county commissioners, who put out a plan and delivered.

When the commissioners started talking with creditors, "We asked them to believe nothing that they heard and only what they see," the county's Stephens said.

The 2024 warrants eliminated the big jump in debt service in 2024 and allowed the county to schedule moderate 3.49% per year sewer rate increases for the next 10 years. The new bond indenture directed a portion of revenues to a customer assistance program to assist low-income customers. The capital appreciation bonds were replaced with current interest bonds. 

The new warrants had serial maturities from 2024 to 2045 and term maturities in 2049 and 2053 and priced with yields to maturity from 3.31% to 4.51%.

The 2013 warrants also had a 2053 final maturity, Stifel's Dunn noted, so there was "no kicking the can down the road." The 2024 financing lowered the issue's perpetual ascending debt service of 3.3% per year to 1.5% in years one to 15, he said, with level debt service thereafter. 

Warrants are used in Alabama to avoid having to bring bonds to referendums, but the issuer must approve appropriations to pay them each year.

The latest warrants were rated Baa1 by Moody's Ratings, BBB-plus by S&P Global Ratings and BBB by Fitch Ratings.

The deal provided Jefferson County with $600 million in net present value savings or 26% of par, Dunn said.

The deal eliminated subordinate debt. The refunding allowed revisions to the county sewer warrant indenture to provide investor safeguards and flexibility to the county's operations, Adams said. 

Revisions also allowed access to state revolving fund and the U.S. Environmental Protection programs, Adams said, whereas borrowing restrictions in the 2013 indenture barred their use.

Several deal professionals credited Stephens and Knight for declining the professionals' advice on how or when to sell the deal.

Many professionals had urged the commissioners to use bond insurance, a tender, or, most prominently, forward delivery of the bonds. 

The market was favorable for a refunding in fall 2021, but in 2023 interest rates climbed substantially.

Some deal professionals argued for an October 2023 sale date. But Stephens and Knight thought a sale at the start of 2024 would work better, Stephens said. Through luck or "maybe naiveté … the stars all aligned and everything fell into place."

In late 2023 Municipal Market Data's 30-year AAA yield peaked at 4.57%. But "by the time we priced in early January, MMD had fallen by 110 basis points," Adams said. "We have often joked about the commissioners being the Nostradamus of the municipal market."

The commissioners' rejection of forward delivery and postponement of the sale to early 2024 was "a gamble that paid off," said Terminus' Arrington.

To attract interest in the deal, the county held 22 one-on-one investor meetings and a group investor meeting with over 200 investors.

"For at least two days, several commissioners, the county manager, the county chief financial officer, the county attorney, the county director of environmental services, bond counsel, disclosure counsel, feasibility consultants, senior managers and financial advisors were present either in person in a conference room in the county courthouse or via video to meet with 20-plus individual investors and present information and answer questions regarding the county, the sewer system and the transaction," Balch's Long said.

The deal ended with seven institutions ordering more than $1 billion each and 142 institutional orders. Over $500 million of orders came from international investors.

"The impact of this deal was that it was the last straw in putting our county on solid ground going forward," Knight said.

Jefferson County continued its rise from bankruptcy Monday — Moody's upgraded its general obligation debt to A2 from A3 while affirming is sewer revenue bonds at Baa1.