SAN FRANCISCO - Moody’s Investors Service said in a report Wednesday the likelihood is growing that Stockton, Calif., will default on its debt as mediation with creditors nears a June 26 deadline and bankruptcy looms.
The ratings agency said the city’s ratings, even on secured obligations, could be subject to further downgrades during bankruptcy.
“While Stockton has several classes of bonds, the city’s pension and lease obligations have the greatest risk of default and loss while its water and sewer and special tax bonds are more insulated from default risk,” said Moody’s analyst Gregory Lipitz in the report.
Lipitz said a default is likely because the city said it will run out of cash on July 1, the end of the fiscal year, and it will file for bankruptcy if creditors don’t make enough concession to help it avoid filing for Chapter 9 protection.
Moody’s said it expects Stockton’s enterprise debt and special tax bonds to be considered special revenue obligations, which would receive protection from default and haircuts during bankruptcy.
However, the ratings agency said the city’s pension and lease revenue bonds are unsecured obligations of the general fund and would likely be subject to default and a haircut.
If it moves ahead with a bankruptcy, Stockton, with more than 300,000 residents, could become the largest city in the country ever to file for bankruptcy.
The mediation sessions, set up under terms of a recent state law designed to discourage bankruptcy filings, will end June 25. The talks were extended 30 days following 60 days of discussions.
Stockton is facing a $26 million deficit next fiscal year after tackling $90 million of shortfalls over the last three.
The City Council voted on Feb. 28 to enter into deliberations with creditors under last year’s Assembly Bill 506, which strongly encourages municipalities to try mediation prior to filing for Chapter 9 protection.
Stockton has already caused three sets of lease revenue bonds to default following the council’s decision in February to stop payments from the general fund on $110 million of par value of debt through the end of the fiscal year. Seven bond issues rely in some way on support from the city’s general fund.
