Moody's Investors Service said it has downgraded to Ca from Caa3 the city of Stockton, Calif.'s series 2007 pension obligation bonds and changed the outlook to negative from developing.
The agency also changed the rating outlook for the city's 2006 lease revenue bonds to developing from negative. The rating on the 2006 lease revenue bonds is affirmed at Caa3.
Moody's rating actions on the city's 2006 lease revenue bonds and 2007 pension obligation bonds reflect the proposed treatment of these bonds' creditors as outlined in the city's plan of adjustment adopted on October 3, 2013.
Under Chapter 9 of the bankruptcy code, a municipality must issue and have confirmed a plan of adjustment before it can emerge from bankruptcy. Thus, the city's plan serves as the its blueprint for reorganizing its debt and other aspects of its operations.
In Stockton's case, the success of the plan is contingent upon voters passing a ¾ cent sales tax and the plan's confirmation by the court. Among its proposals, the plan calls for the series 2006 lease revenue bonds to be paid in full, without interruption in debt service.
For the series 2007 pension obligation bonds, the city is proposing significant losses to bondholders. Moody's now estimates these losses to be in a range of 50%-65% of principal from the date the city first defaulted on the series 2007 bonds. While better than the city's initial proposal of losses of around 80%, the projected losses are somewhat greater than had been implied at the former Caa3 rating level.
For the series 2007 pension obligation bonds, the Ca rating assumes losses will be between 50% and 65%, although these losses will accrue to Assured Guaranty Municipal Corp ("Assured", A2 stable) rather than to bondholders. 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 bondholder recovery.