Fat yields needed for Alabama county deal lure overseas buyers

Wednesday, 20 Nov 2013 | 5:17 PM ET

Nov 20 (Reuters) - A $1.78 billion bond sale by Alabama's Jefferson County pulled in overseas buyers and other unusual municipal market investors, offering fat interest rates to overcome the taint of a landmark 2011 bankruptcy.

Not only did Jefferson County's deal mark the first time a U.S. local government has sold muni debt while in bankruptcy, but the three-day offering that finished on Tuesday also skirted a taboo in America's $3.7 trillion muni market on borrowing by issuers that have short-changed Wall Street lenders.

Some yields in the sale, whose proceeds will be used to pay off current Jefferson County sewer-warrant owners at big discounts, were as high as 8 percent on subordinate lien sewer revenue capital appreciation warrants.

The county's success in selling new bonds and hammering out big concessions from creditors through Chapter 9 bankruptcy may lead to more filings by hard-pressed local governments, according to lawyers and analysts.

But troubled borrowers also learned this week that tax-free interest rates for fallen issuers will be very high, even if they can find buyers for their new debt, according to analyst Randy Smolik at Municipal Market Data.

"This is one of the first situations to occur where they can understand their interest rate-cost risks," Smolik said.

Jefferson County, home to Birmingham, on Wednesday tried to secure a judge's confirmation of a negotiated plan to end its two-year bankruptcy. A ruling may come as soon as this week, according to lawyers.

The exit plan being weighed by the judge calls for 40 years of unpopular rate hikes for customers of the Jefferson County sewer system, whose financial woes were the main driver of the county's bankruptcy on Nov. 9, 2011.

Central to the plan is the success of Tuesday's debt sale, whose proceeds will pay off JPMorgan Chase and other county sewer-debt creditors at roughly 54 cents on the dollar.

"All of the county's new sewer warrants have been purchased by the underwriters at an all-in cost of borrowing of 6.964 percent and an average maturity of 32.03 years," said David Carrington, president of the Jefferson County Commission. "More than 200 investors placed orders."

Buyers from Europe and Asia were among the bidders, he said. Investors lured by the very high yields also included insurance companies with a taste for the deal's unusual 40-year maturities.

Much of the Jefferson County's debt underwritten by Citigroup Global Markets and others was composed of current interest swaps, according to pricing scales. On Tuesday, after two days of retail sales, underwriters both cut and raised prices for institutional customers.

Prices on 2044 insured senior lien sewer warrants rated an underlying BBB-minus by Standard & Poor's and BB-plus by Fitch in a $395 million tranche were changed to yield 5.30 on Tuesday versus 5.50 for retail investors. The yield on a 2053 maturity in the same series was 5.65 percent on Tuesday, down from 5.75 for retail buyers.

But institutional buyers got higher yields than retail on uninsured, long-maturity subordinate current interest warrants in an $811 million tranche. A 2042 issue was priced at 6.25 percent for retail buyers but repriced on Tuesday to yield 6.45 percent. That compares with a 4.11 percent yield on an AAA-rated 2042 bond on MMD's benchmark scale.

Yields on a 2053 issue of the same series finished at 6.85 percent, up from 6.50 percent, after a 25 basis-point increase in the coupon to 6.50 percent.