NEW YORK - Standard & Poor's Ratings Services said it lowered its underlying rating (SPUR) three notches to BB-plus from BBB-plus on Stockton Public Financing Authority, Calif.'s senior-lien series 2005A water revenue bonds and series 2010A variable rate demand water revenue bonds, issued on behalf of the city of Stockton.

Standard & Poor's also lowered its long-term rating to BBB from BBB-plus on the authority's series 2005A bonds. The outlook is developing. The series 2005A long-term rating and outlook solely reflects that of the bond insurer, National Public Finance Guarantee Corp, which is now rated higher than the authority's SPUR.

S&P also lowered its long-term rating two notches, to BB-plus from BBB, on the authority's subordinate-lien series 2009A and 2009B bonds. Finally, the agency lowered its long-term rating to AA-minus/A-1 from AA-plus/A-1 on the authority's series 2010A variable-rate demand water revenue bonds. The long-term rating on the series 2010A variable-rate demand water revenue bonds is based on the application of S&P’s joint support rating criteria assuming medium correlation between Union Bank N.A. (A-plus/A-1), which provides a letter of credit (LOC), and the city's water system (BB-plus). In addition, we removed all of the applicable long-term ratings and related SPURs from CreditWatch and assigned them a developing outlook.

"The rating actions reflect our view of several credit risks facing the city's water enterprise, including, primarily the potential for an acceleration of principal payments for the series 2010A variable rate bonds," said Standard & Poor's credit analyst Paul Dyson. "Upon an event of default, Union Bank is permitted, under provisions of the reimbursement agreement, to send a notice to the trustee to cause a mandatory tender of the bonds. Union Bank indicated that it is maintaining its various rights and remedies available to it under the reimbursement agreement and, according to bank counsel's written confirmation on behalf of Union Bank, has deemed that one or more events of default to have occurred; however, the bank is not making any present demand on the city and does not currently intend to declare any event of default under the reimbursement agreement," added Dyson.

Other credit risks reflected in the lowered ratings include uncertainty with regard to ancillary credit impacts from the city's ongoing AB 506 Confidential Neutral Mediation Process (the AB 506 process) and the potential Chapter 9 bankruptcy filing.

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