SAN FRANCISCO — National Public Finance Guarantee Corp. and Assured Guaranty Corp. will participate in debt-restructuring talks with Stockton, Calif., under a new state law meant to help municipalities avoid bankruptcy.

National, a subsidiary of MBIA, has notified the city that it will participate in the restructuring talks but only under certain conditions — specifically, that it reserves the right to enforce the obligations it has with the city, according to a person close to the matter who declined to be identified.

National insures $224 million of debt issued by the city, $89 million of which is tied to Stockton’s general fund.

A spokesperson for Assured Guaranty, which has said it is exposed to $150 million net par of Stockton bonds, confirmed it will also participate in the process.

"We're actively monitoring but not participating in the mediation discussions because we're a very small creditor," an Ambac spokesperson said.

Stockton, a city of nearly 300,000 residents an hour and a half drive east of San Francisco, is trying to avoid becoming the largest city in the country to file for bankruptcy.

The city has been battered by the housing bust, rising employee costs and a load of debt.

National will also continue to pursue the lawsuit filed by Wells Fargo Bank NA on behalf of the bond insurer, seeking repossession of three parking structures that secure $32 million of lease revenue bonds now in default, according to the source.

The Stockton City Council voted on Feb. 28 to begin a confidential mediation process with creditors under terms of a new state law, Assembly Bill 506, designed to give financially stressed local governments a chance at staying out of bankruptcy.

Even though the mediation process hasn’t yet started, city officials have declined to answer questions about who will be participating in the mediation, saying the whole process is confidential. They said any information pertinent to bondholders would be released through the Municipal Securities Rulemaking Board’s EMMA website. 

Friday, March 16 is the final day for creditors to accept invitations by the Stockton to participate in the voluntary, nonbinding talks.

The city and any other stakeholders that accept mediation, such as unions and other bondholders, will start the process of selecting a mediator for up to 12 days.

Selection of a mediator starts a 60-day clock that can be extended by up to 90 days by a majority vote of creditors.

If the mediation fails, the city can still file for Chapter 9 bankruptcy, or at any time it could declare a fiscal emergency during a public hearing and start the bankruptcy.

The Stockton City Council voted last month to suspend payments toward $110 million of general-fund supported bonds through June 30, the end of the current fiscal year, in an effort to shore up its finances.

The city said it so far has stopped payments on the 2004 parking bonds, and on $35 million of 2009 lease revenue bonds issued by the Stockton Public Financing Authority.

The city also defaulted on $40 million of two series of 2007 variable-rate lease revenue bonds issued by the 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 insures the 2007 bonds and the 2009 bonds are not insured, according to the official statements.

Overall, Stockton has $327 million of general-fund-supported lease revenue and pension obligation bonds issued by the city, the Public Financing Authority and the Stockton Redevelopment Agency. In its disclosure to holders of all general-fund-backed bonds, the city said “no assurance can be given” that the city can make payments due for debt service in fiscal 2013 or later.

Stockton had more than $702 million of bonds outstanding as of June 30, 2010, including debt issued for restricted enterprise funds such as water, sewer and parking enterprise debt, according to city financial statements.

Stockton’s restructuring attempt has resulted in “super-downgrades” of its rating by Moody’s Investors Service to Ba2 and Standard & Poor’s to “selective default.”

The city government has said it will be restating finances for past years after officials found accounting errors. It has yet to file a comprehensive annual financial report.

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