Bond markets generally focus on who has rights to specific cash flows and control over assets. That was what Alabama federal bankruptcy court Judge Thomas Bennett was addressing when he issued an opinion Friday afternoon covering the insolvent Jefferson County sewer system.
To recap the situation in Jefferson County, re-read what I wrote in November:
Last year, amid the county’s fiscal and political meltdown, the Russell County Circuit Court appointed a water system professional, John Young, to take over the management and operation of the sewer system. This action came at the request of the bond indenture trustee, the Bank of New York, which wanted the bond payments protected. Now the county is fighting with the receiver and creditors for control of the sewer system in bankruptcy court.
The crux of Judge Bennett’s ruling related to whether the sewer receiver, John Young, could keep control of Jefferson County’s most important asset, the sewer system, while the county was trying to consolidate its assets in the bankruptcy process. Bank of New York and other bondholders argued that the federal bankruptcy proceeding could not trump judicial actions taken at the local level. In other words BoNY, representing bondholders, wanted to keep the control of the sewer system and its cash flows. Although revenue bondholders have a lien, or right, to the cash flows of the sewer system, they also wanted control of the asset.
Judge Bennett, in his ruling, confirmed the right of bondholders to receive the revenue payments they are due from the sewer system. This will make the municipal markets cheer because it confirms an important plank of the system. On the other hand, the judge also ruled that control of the sewer system must be returned to Jefferson County. Bondholders would have preferred to keep control of this asset, which was collateral for the bonds.
Chapter 9 municipal bankruptcy cases are rare and market players closely watch the outcomes. The judge made a sound ruling today and the case will grind on. Jefferson County is not yet out of the woods but the path is becoming a little clearer.