SAN FRANCISCO — Standard & Poor's downgraded Vallejo's certificates of participation to an underlying C rating from B yesterday as the California city inched closer to completing a bankruptcy restructuring that may include a debt-service moratorium.
The action affects $4.8 million of COPs sold in 1999. The San Francisco Bay Area city has made reduced payments on $53 million of general-fund backed debt under the bankruptcy court's protection and is trying to negotiate an adjustment plan that delays debt payments for several years.
"The city's December 2009 bankruptcy workout plan indicates zero principal or interest payments will be made for three full years," said Standard & Poor's credit analyst Paul Dyson. "We also expect that, given these forecasted partial and non-payments, the debt-service reserve fund will be unable to cover the payments scheduled for July 15, 2011."
The 1999 COPs are insured by MBIA Insurance Corp., now National Public Financing Guarantee Corp., which also provided the debt-service surety on the debt. Standard & Poor's rates the insurer A with a developing outlook. The majority of Vallejo's other general fund debts are held by Union Bank of California, which was the city's letter-of-credit provider.
Vallejo's main justification for its May 2008 bankruptcy filing was the cost of labor contracts, and it continues to make gradual progress in rewriting its labor agreements. U.S. Bankruptcy Judge Michael McManus in September allowed the city to reject its labor contracts.
The City Council was scheduled to consider a new agreement with the city's firefighters last night. The council agenda packet didn't include the details of the agreement. Lawyers for the International Association of Firefighters Local 1186 said in a filing last week that the union's membership has approved the deal.
Vallejo's final holdout union, the International Brotherhood of Electrical Workers, is scheduled to argue an appeal of McManus' contract rejection ruling today. But it will also begin binding arbitration on a replacement pact on March 31.
The negotiations are important to finalization of the city's plan to adjust its debts and to exit bankruptcy. McManus earlier this year declined to give the city a hard deadline for composing a plan, but told lawyers he expected to see something by the summer. The city proposed a bar date — an official deadline for filing claims — of no earlier than Aug. 31, and workers have proposed a July 31 deadline.
Wells Fargo Bank, trustee on 13 of Vallejo's outstanding COPs and bonds, said in a filing last week that it supports the city's proposed bar date and will submit claims on behalf of its bondholders. The trustee last week asked bondholders not to file claims on their own to avoid multiple claims for the same indebtedness, according to a filing on the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system.
Vallejo continues to struggle to come up with budgets it can afford. The city, which declared bankruptcy before the housing bust and recession kicked in, has now seen revenue drop by 20% from fiscal 2008 levels.
