LOS ANGELES — Moody's Investors Service downgraded the underlying rating of bankrupt Stockton, Calif.'s series 2007 pension obligation bonds to Ca from Caa3 and changed the outlook to negative from developing.

The rating agency also changed the outlook for the city's 2006 lease revenue bonds to developing from negative and affirmed those bonds at Caa3.

Moody's analysts said Monday's pension bond downgrade reflects "the proposed treatment of these bonds' creditors as outlined in the city's plan of adjustment adopted on Oct. 3."

Stockton has settled with all three of the insurers that wrap its outstanding lease-backed and pension obligation bonds.

The adoption of Stockton's adjustment plan is contingent on voters passing a ¾ cent sales tax and the plan's confirmation by the court.

The plan calls for the series 2006 lease revenue bonds to be paid in full, without interruption in debt service; but the city is proposing significant losses to the 2007 pension obligation bonds.

Moody's analysts said they now estimate these losses to be in a range of 50% to 65% of principal from the date the city first defaulted on the series 2007 POBs, though bondholders would see losses covered by insurer Assured Guaranty Municipal Corp.

The projected losses are somewhat greater than had been implied at the former Caa3 rating level, analysts said.

Under the plan, beginning in June 2014 Assured will receive annual payments from the city from various sources.

The city has deemed these payments "non-contingent." Assured may receive additional, "contingent" payments tied to the performance of the city's future revenues, which would increase its recovery.

The negative outlook on the series 2007 pension obligation bonds reflects the high likelihood that losses could exceed Moody's estimates, especially if the court or all of the city's creditors do not approve the plan.

For the series 2006 lease revenue bonds, although the plan calls for continued payment of debt service, Moody's has changed the outlook to developing to reflect the possible opposite outcome for National Public Finance Guarantee Corporation, the insurer of those bonds.

That reflects the possibility that the plan will not be approved as proposed and restructured further, Moody's said.

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