BRADENTON, Fla. - An Alabama federal court's refusal to dismiss an appeal of Jefferson County's bankruptcy plan is credit negative for sewer warrant holders because it could jeopardize the county's ability to repay the debt, Moody's Investors Service said Oct. 6.
U.S District Judge Sharon Blackburn in Birmingham ruled that an appeal can go forward challenging the constitutionality of a security feature that allowed the county to close on $1.8 billion of 40-year refunding sewer warrants last December. The ruling was handed down Sept. 30.
That security is the ability of the bond trustee to ask the bankruptcy court to compel the county to enforce the plan, if elected officials refuse to raise sewer rates necessary to service the debt.
"The court's decision is credit negative for sewer warrant holders because it raises the possibility that a successful appeal will undo the county's aggressive rate increases, which are critical to its ability to pay the new debt service," said Moody's analyst Christopher Coviello.
"If the court rules that the bankruptcy judge does not have the authority to enforce the approved rate increases, there is a significantly higher risk that future revenues would be less than what the county needs to cover debt service payments," Coviello said, noting, "Jefferson County's ability to repay debt service is already precarious."
Even if the county did not issue any more parity debt, sewer revenue debt service coverage beyond 2024 would be relatively narrow at around 1.2 times, according to Moody's. Comparing the current year's net revenues with maximum annual debt service, which will occur in 2053, coverage is significantly lower at 0.4 times.
Moody's said the 0.4 times coverage is well below the median of 1.62 times for all rated sewer systems in the country, and 1.58 times for the largest systems.
"Because of its back-loaded debt structure, Jefferson County likely did not build in enough revenue capacity for future capital investments, even with the planned rate increases," said Coviello. "Beyond regular system renewal and replacement, the sewer system will be hard pressed to fund significant investments to meet the stricter environmental standards that we expect will be in place by 2024."
To meet the escalating debt service requirements, and the first 10 years of capital and operating expenses, the county's plan included annual rate increases of 7.89% from 2014 to 2018, and 3.49% annually from October 2018 through maturity in 2053.
Moody's, which rates Jefferson County's general obligation limited tax warrants Ba3 with a stable outlook, commented on last fall's sewer deal even though it does not rate those warrants. The rater said then that the refunding debt should be rated in the B or Ba range, which reflects "substantial-to-high credit risk."
