SAN FRANCISCO — A judge has awarded Wells Fargo N.A. three parking garages leased by the financially troubled city of Stockton, Calif. that are pledged as assets backing more than $30 million of defaulted bonds.
San Joaquin Superior Court Judge Roger Ross ruled Thursday against the city and gave possession of the garages to the bank, which is the trustee for the bondholders, after the city failed to make a $779,000 debt service payment on March 1.
Stockton spokeswoman Connie Cochran said the city will now sit down with Wells Fargo to work out terms and conditions over operation of the garages.
“The city has obtained assurance the garages will not close,” Cochran said in an emailed statement. “These assurances and our ability to work through the details with Wells Fargo are particularly important in light of how essential these resources are to downtown Stockton and special events.”
As a result of the ruling, the parking garage revenues will now be used to pay past due rents owed to bond holders, Wells Fargo said.
“The city made the unilateral decision to stop paying rent on the parking facilities, and the court ruled that it had no legal justification to do so,” Wells Fargo spokeswoman Elise Wilkinson said in an email.
The ruling is just the latest financial problem for the city of nearly 300,000 in California’s Central Valley, which has been crushed by the housing bust.
The parking-garage bond default resulted from the City Council’s vote last month to suspended payments on three series of bonds, including the garage bonds, totaling $110 million in par value through June 30, the end of the fiscal year.
The council also voted on Feb. 28 to begin a confidential mediation process with creditors under terms of a new state law designed to give financially stressed local governments a chance at staying out of bankruptcy.
As trustee, Wells Fargo filed the complaint in court at the behest of National Public Finance Guarantee Corp., the insurer of the bonds.
"We are pleased by the court’s decision, which recognizes that the rights and remedies granted to bondholders by the city in the financing documents are enforceable, notwithstanding the AB 506 mediation proceeding,” said Kevin Brown, a spokesman for National in a statement.
Brown said National has yet to receive a claim from bondholders because reserves have been sufficient so far to cover debt service."
Wells Fargo served the city with a notice on March 1 requiring it to pay delinquent rents in three days or vacate and deliver possession of the property to the trustee.
The Stockton Public Financing Authority sold $32.8 million in lease revenue bonds in 2004 to fund construction of parking garages and other capital improvements. The bond indenture said the lease payments by Stockton support the debt and the property is security.
The city owed $1.9 million in interest and principal payments for fiscal 2012 ending in June and roughly the same amount next fiscal year, according to the official statement for the bonds.
Stockton said it so far has stopped payments until the end of June on the 2004 parking bonds, and on $35 million of 2009 lease revenue bonds issued by the financing authority.
The city also defaulted on $40 million of two series of 2007 variable-rate lease revenue bonds issued by the financing authority for property at 400 East Main Street, which had been set for the future city hall. The troubled European bank, Dexia provided liquidity on the bonds.
Assured Guaranty Corp. insured the 2007 bonds and the 2009 bonds were not insured, according to the official statements.
The city said in its disclosure to holders of all general-fund backed bonds, “no assurance can be given” that the city can make payments due for debt service in fiscal 2013 or later.
Overall, Stockton, its redevelopment agency, and its financing authority have issued $327 million in debt through seven series of general-fund-supported lease revenue or pension obligation bonds.
National Public Finance Guarantee has said it has $224 million of insured exposure to Stockton’s debt, $89 million of which is backed by its general fund.
Assured said it is exposed to the tune of more than $150 million net par. Ambac insures $13 million of Stockton bonds, according to city documents.
Stockton had more than $702 million of bonds outstanding as of June 30, 2010, including city and RDA bonds and debt issued for restricted enterprise funds such as water, sewer, and parking enterprise debt, according to city financial statements.
Stockton’s financial problems led to “super downgrades” by ratings agencies.
Moody’s Investors Service has downgraded the city’s issuer credit rating to Ba2 from Baa1 since the city announced its measures to try to avoid bankruptcy
Standard & Poor’s has dropped the city to “selective default” after successive downgrades from A-minus.