Disingenuous or Misinformed?
This article in yesterday’s Birmingham News has me wondering.
It outlines RSA chief David Bronner’s promise to buy the Jefferson County sewer system and then sell it back to the county after seven years — or maybe 15 — for the original purchase price.
Here is how his plan would work:
The county files for Chapter 9 bankruptcy on the sewer system’s $3.2 billion of debt owed to bondholders who lent money by buying bonds sold for expansions and repairs.
RSA buys the system for a price that Bronner said will probably fall between $1.1 billion and $1.4 billion, payable in cash. He said he won’t know an exact purchase price until he looks at the sewer system’s books in detail.
Bondholders take the purchase price and wrangle with the bond insurers over their remainder.
The sewer system operates as before. Its yearly free cash flow - the money left after paying expenses and for capital improvements - would belong to the RSA, which invests money to pay for the pensions of 300,000 active and retired state workers.
After seven years, the county could sell bonds to repurchase the sewer system at the price RSA paid for it. Bronner said if seven years is too soon, he would agree to the same terms 15 years out.
Okay, unless I’ve been given some really bad information, and I don’t think that’s the case, there are several problems with that scenario. A rather large one isn’t indicated explicitly in the above list but rather here:
A Jefferson County bankruptcy filing would get rid of the claims of bondholders who are owed $3.2 billion after the county began missing interest and principal payments this year because interest rates skyrocketed. By agreeing to accept partial settlement in bankruptcy court, the bondholders would have no course of legal action against the county, Cohen said.
Maybe that’s just some really poor writing, but the implication — no, the actual statement — is that the act of filing bankruptcy would let the county off the hook for repaying its bond obligations. Um, no. And going from that immediately to, “By agreeing to accept partial settlement in bankruptcy court, the bondholders would have no course of legal action against the county,” skips a couple of huge steps in the process. First, the county would have to formulate a workable repayment plan. Second, a majority of bondholders would have to approve it.
Then there’s this little roadblock: according to bankruptcy attorney Scott Williams, who spoke to the subject last Friday at Samford, any asset the county sells out of bankruptcy comes encumbered by its associated debt. If he’s right, anyone who purchases the sewer system would still be on the hook for paying off sewer bondholders at some level. Sure, the purchase price could go to off pay creditors, but will the majority of bondholders agree to take 34 to 44 cents on the dollar? That’s assuming Bronner still wants to cough up as much as $1.1 to $1.4 million after seeing the sewer system’s books. Williams also pointed out that in municipal bankruptcies, the municipality doesn’t go away like a bankrupt business might. If the county couldn’t reach an agreement with bondholders, the judge could simply throw it back out of bankruptcy, and we’d be back where we started.
And if the county decides to sell the sewer system out of bankruptcy, it goes to the highest bidder. That might be the RSA, but it could be some other entity with no interest whatsoever in the long-term consequences to the citizens of Jefferson County or the state as a whole.
Someone in the audience at Friday’s meeting asked how last week’s $44 million forbearance payment was applied, and we were told it and the previous payment had been applied to principal. If that’s the case, maybe it’s possible the county could continue to make forbearance payments, actually reduce the outstanding debt, and buy a bit more time to come up with a solution that’s workable in the real world.
The Citigroup plan, a complicated mess of automatically triggered tax increases, isn’t going to fly with the voters of this state. Bankruptcy isn’t the panacea that its supporters are trying to sell. There has to be a better way — one that doesn’t require a statewide vote. I suggest our commissioners stop squabbling and get busy looking for it.
August 11th, 2008 at 2:31 pm
So what are your thoughts on the comparison of JeffCo filing bankruptcy to that of Orange County (mentioned in the article) filing bankruptcy? I know in some ways it’s like comparing Apples to Oranges due to the size of OC and the cause of bankruptcy, but it’s encouraging to see they bounced back a year later. Then again, I bet they have much better leadership in the Commission than people like Smoot.
It is also my understanding that the bondholders would receive the remainder of their $3.2b from the bond insurers who have been charging premiums all these years for this type of situation specifically. The only people that are getting stiffed in the deal would be the insurers and potentially some investment banks - who have built risk into their equations when they did the initial underwriting and analysis.
Also, I whole heartedly trust David Bronner’s business ideas and strategies over those of the JeffCo County Commission. I think he’s got a leg up on all of them combined easily. Has anyone looked at the returns he achieves for the RSA? As an ex-state employee, I am VERY glad he’s running my pension.
Citigroup and any of the other banking and investment entities involved do NOT have JeffCo or Alabama’s best interest at heart. They are most concerned with getting their money back. Rightfully so, but at the same time, they’re the ones who underwrote bonds for a county as incompetent as JeffCo. That’s the risk of doing business.
The little roadblock you mention is a huge one, which is why I don’t think that would actually be the case. Otherwise, why would RSA/Bronner be interested in the B’ham Sewer System if the whole thing would still be debt laden after bankruptcy?
You make mention of the Sewer System going to the highest bidder, which may or may not end up being the RSA, but could be some other disinterested 3rd party. That point does concern me, but again, I think Bronner and his team have a plan in mind to address that risk.
Either way, it will for sure be very interesting to see how this plays out. As always, makes me very glad I don’t live in that county anymore, as I have a feeling the taxpayers will still end up eating most of this problem.
August 11th, 2008 at 3:22 pm
Bronner’s plan is bogus. Under Chapter 9, the system revenues are not stayed and the revenue remains pledged to pay off the creditors. Even getting past this point, putting the system up for sale opens it up to an auction. I suspect that there are foreign interests (particularly with the weak dollar) who would pay more for the system than Bronner proposes. Bankruptcy must be avoided!
August 11th, 2008 at 4:42 pm
The little roadblock you mention is a huge one, which is why I don’t think that would actually be the case. Otherwise, why would RSA/Bronner be interested in the B’ham Sewer System if the whole thing would still be debt laden after bankruptcy?
Jonathan, I know people lie all the time, but I’m not sure why the attorney would be lying about this particular aspect. The debt doesn’t go away just because bankruptcy is filed. Chapter 9 is not the same as Chapter 7. The News article says that the purchase price would go to pay off bondholders, which would cover part of the sewer debt but certainly not all of it. Of course, if the county can negotiate a discounted payback to the bondholders, it may be enough.
I have no problem with David Bronner. He has done amazing things with the RSA. I just think the people who are pushing his plan aren’t telling the public everything. Neither are the Citigroup people. I wouldn’t trust most of our county commissioners as far as my 10-year-old could throw them.
It certainly seems that the bond insurers would have to pay up, but from what I hear they’re hurting as well, and I suspect they’ll do anything in their power to avoid making a payout. Likely entailing expensive litigation. They would certainly jack up their rates a significant amount the next time JeffCo came to the trough.
I’m afraid it’s going to be the bondholders and taxpayers who get hosed. I know there’s risk inherent in any investment, but municipal bonds are just about as safe as you can get, and that means lots of older people who don’t have as much time to recoup their losses have them in their portfolios. Not good. And astronomical increases in sewer rates (and a possible increase in sales and occupational taxes as well) hurt those with low and/or fixed incomes the most.
August 11th, 2008 at 4:51 pm
Oh — I didn’t answer your question about comparison to Orange County. That was a rosy scenario in the News. OTOH, one of the speakers at Friday’s presentation said that California (don’t remember the specific agency, and I don’t have it in my notes) estimated that the Orange County bankruptcy cost other entities in the state $200 to $250 million a year due to higher borrowing costs. The JeffCo bankruptcy is substantially bigger than OC’s. I don’t know; my guess would be reality would fall somewhere between those two possibilities, with the huge size of the bankruptcy causing it to lean more toward the latter.
August 12th, 2008 at 10:18 am
Wow that is so confusing. It’s why I love you so much and come here every day…you can sort it all out!! Thank God I live in SHELBY county!!
August 12th, 2008 at 10:36 am
You know, the frustrating part is not so much the confusing nature of all the proposals, it’s the fact that you don’t know who’s telling the truth. Or how much of the truth is being told. What’s fact and fiction?
I’m sure there are holes in the RSA plan, and I guess technically, I don’t even get a say since I’m not a JeffCo resident.
Thanks for everyone’s responses, it was educational as always.
August 12th, 2008 at 6:01 pm
i hate to be critical of bloggers in there own blog, and I apologize in advance.
It really gets to me how regular everyday citizens like our author and “Bill” know so much more than professional investment advisors.
If you guys are so smart and have the entire situation figured out, if you know the legal ins and outs, and know the bankruptcy code better than professionals like Mr. Bronner and the dozens of attorneys under his employ, why aren’t you proposing and self funding a plan to get JeffCo out of this mess?
This is my problem with “average” citizens voting and having a say in county government. When “average” citizens are involved with government you get…wait for it……..JeffCo…unsophisticated, uneducated, and/or regular joe’s running the county right into bankruptcy court.
These are extremely complicated financial matters and millions of voting Americans can’t even balance a check book or understand simple interest. One doens’t have to look far to find evidence of this. How many people have been paraded on the evening news to say “I didn’t understand the mortgage I was signing….Countrywide took advantage of my unsophistication…” (No implication that Bill or the Blog author fall into either of these groups) These “average Joe’s” are the people that are voting on and deciding the complicated financial issue’s of JeffCo.
These same average Joe’s then they sit back and complain about every little detail, as if they know more than the everyone else.
If you know as much or more than Mr. Bronner, go ahead and start your own hedge fund or private equity fund and buy the sewer system and prove it.
August 12th, 2008 at 8:26 pm
“confused”, reading comprehension is a wonderful thing. I suggest you try it sometime. Nowhere in my post did I claim to have “the entire situation figured out”, and I clearly stated that the information on bankruptcy I cited came from a bankruptcy attorney. I also did some reading on Chapter 9 in order to confirm what I heard. Can you actually dispute any of it, or do you just spend your time advocating the “sit down, shut up, and let someone else worry about it” approach?
“Professional investment advisors” led the Jefferson County Commission down the garden path, at least in part because the “average” citizens on the Commission were far too willing to listen to those “professional investment advisors” without doing any independent research.
I can’t speak for Billy (not “Bill”). He’s a first-time commenter here, as are you, and I know nothing of his qualifications. He has a strong negative opinion of the Bronner plan, which you are conflating to me, another reason I think your screen name is appropriate. While I have a high opinion of David Bronner, I think “average” citizens should educate themselves and ask lots of questions before they mindlessly buy into a countywide bankruptcy or the Citigroup plan, which was also conceived by “professional investment advisors”.
As for me, I’m quite capable of balancing a checkbook and even computing compound interest. I also know the difference between “there” and “their”. And I believe “average” citizens have a responsibility to pay attention and do their homework.
August 14th, 2008 at 9:09 am
[...] it looks like the people who were giving me information on bankruptcy were right about one big sticking point in the Bronner plan. Mr. Bronner confirmed it himself in [...]