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Jefferson County Hoses Municipal Debt Holders, Mortgages Future


Jefferson County has officially filed its plan to end the largest municipal bankruptcy in the US to date (we’ll see what Detroit has to say about that record). The plan is precedent setting, says Bloomberg, in that in marks the first time US municipal debt holders have been forced to accept a loss of principal due to bankruptcy. Less than $100 million of the total $4.2 billions will be paid back in full, with most other creditors taking sizable haircuts:

The plan is based on a settlement announced last month among JPMorgan Chase & Co. (JPM), seven hedge funds and a group of bond insurers, which together hold about $2.4 billion of the debt. The group will split about $1.84 billion, with JPMorgan taking the steepest cuts, collecting $375 million of the $1.22 billion it is owed, according to the plan filed yesterday in U.S. Bankruptcy Court in Birmingham, Alabama.

We noted a few weeks ago that as part of the debt restructuring the county would be using capital appreciation bonds, which steeply back-load payments on future generations, to raise the required money to pay back some of the debt. The Bloomberg article notes in passing that hedge funds will collect more than 80 cents on the dollar as they help underwrite this new debt offering, coming off better than most.

Pending possible court decisions in August and November, it looks like Jefferson County’s bankruptcy will soon be officially over. Whether this arrangement ends up being another raw deal for Jefferson County taxpayers down the road, we suppose we’ll just have to wait and see.

[Money vortex image courtesy of Shutterstock]

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  • ljgude

    Just a peripheral event or the beginning of a more general collapse?

  • Marty Keller

    This is just another example of our mass lunacy. As Glenn Reynolds says, what can’t go on forever, won’t.

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