What effect will Jefferson County’s bankruptcy have on the credit rating of the rest of the state? It’s not a new question, and there’s a wide range of opinions.
But there’s a fresh answer coming from Assured Guaranty, the top municipal bond insurer in the U.S. They say there’s no question what the effect is. The company is no longer doing business in Alabama. Assured is redlining Alabama until the state government gets serious about municipal finances.
“We are concerned that the State of Alabama, unlike Pennsylvania and Michigan, has failed to recognize the far reaching consequences associated with municipal bankruptcy filings that unfairly target bondholders, ” Assured Guaranty officials told Business Alabama. “We are disappointed by the lack of positive measures Alabama has taken with its local governments, and, therefore, we continue to exercise strict judgment in our evaluation of credits to insure in the state.”
The company may not come back until a formal review process for the handling of potential future municipal bankruptcies is codified in the Legislature, say company officials.
And they’re not intending to hold their breath.
“There is thus no end in sight to the county’s delay as it continues to wait for legislative intervention, ” Assured said in court papers filed in July, asking the judge overseeing Jefferson County’s bankruptcy to give Jefferson County a Sept. 28 deadline to come up with a plan to get solvent again.
Assured Guaranty insured $352 million of the over $3 billion worth of the Jefferson County sewer bonds refinanced by J.P. Morgan. The insurer has sued J.P. Morgan in a New York court, claiming the bank hid the fact that it bribed Jefferson County officials to land the bond deal.
Getting money out of J.P. Morgan might prove as difficult as getting it out of Jefferson County, or getting action from the Legislature.
Fueling complacency in the Legislature is the fact that things don’t seem that bad for most of the state.
When the City of Tuscaloosa issued new debt in May to refinance an existing balance, it got a lower rate than it had before and enjoyed $1.27 million in immediate savings, plus another few hundred thousand over the next several years.
“If there was any detrimental effect (from Jefferson County’s bankruptcy), it was very minimal, ” says Mike Wright, Tuscaloosa’s finance director. Wright says some institutional buyers have shied away from Alabama debt following recent events, but even without those investors there’s enough demand to keep the city’s rates down.
It’s the same story in Huntsville, where city Finance Director Randy Taylor says the government recently was able to meet all its financial goals on two separate debt issuances. In fact, Taylor says, both were oversubscribed. Like his counterpart in Tuscaloosa, Taylor says he hears secondhand that some investors have decided to stop buying Alabama debt. But rumors of a decrease in demand haven’t increased the city’s borrowing costs. And Mobile’s Executive Director of Finance Barbara Malkove offers a similar description of Alabama’s municipal finance environment.
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In spite of those success stories, not everyone is convinced that Alabama’s local governments are entirely out of the woods.
For example, John Mazyck isn’t surprised to hear that cities like Huntsville and Mobile are doing okay. The reason why, the Montgomery-based investment banker says, is that those cities have superior bond ratings. Huntsville debt is rated AAA, the highest rating possible, while Mobile and Tuscaloosa carry AA-rated debt.
It’s Alabama’s rural areas that are more likely to feel an impact from Jefferson’s misstep, Mazyck says. The debt being carried by those governments is more likely to have lower ratings, leaving them more vulnerable to market shocks.
For now at least, it seems an overwhelming preference among investors for all kinds of municipal debt appears to be muting any impact Jefferson County’s bankruptcy may have had. But out east in DeKalb, County Administrator Matt Sharp shares Mazyck’s concern.
“I think the full impact will not be felt by counties and municipalities until rates begin to rise above these historic lows, ” Sharp says. Indeed, in today’s market, even DeKalb County and its A-rated debt—two full grades below Huntsville’s—can save money by refunding old issuances; the county recently saved $500, 000 on two such transactions, Sharp says.
But Sharp doesn’t expect the environment to last. “Once interest rates begin to rise, ” he says, “those differences between a grade A rating and AA and AAA will most likely be more significant. Jefferson County’s financial debacle will have a long-term negative impact on the state of Alabama, ” he predicts, “as well as all the local governments in our state.”
Alex Walsh is a freelance writer for Business Alabama. He lives in Birmingham.
By Alex Walsh
