SAN FRANCISCO — Vallejo, Calif., has reached a tentative agreement with Union Bank that pays the bankrupt city’s largest creditor roughly 60 cents on the dollar.

“We have reached a deal with Union Bank subject to documentation,” Marc Levinson, the city’s bankruptcy lawyer from Orrick, Herrington & Sutcliffe LLP, said in an interview. “We value the present value of the deal with Union Bank at about a 40% haircut.”

He said in principle, the agreement is essentially a reduction in the amount of interest Vallejo will pay on the debt and letters of credit that backed certificates of participation issued by the city. The agreement was roughly outlined in the city’s bankruptcy exit plan filed last week. 

Union Bank is owed about $45 million. However, Levinson noted that finalizing deal documents can “take people who agree into the realm of disagreeing.”

A spokesperson for Union Bank declined to comment on the deal.

Vallejo is located in the Bay Area and has a population of around 120,000. It filed for bankruptcy in May 2008 in response to what it called unsustainable labor contracts and dwindling tax collections.

It is the state’s largest municipal bankruptcy since Orange County’s in 1994.

Vallejo became indebted to Union Bank after the bank paid out on the letters of credit backing three series of certificates of particiption, a type of lease revenue debt, after the city defaulted on the debt following bankruptcy. As part of  the bankruptcy deal, the bank will get a new obligation that provides lease revenue to the bank in exchange for canceling the COPs.

Vallejo’s City Council Tuesday night approved another agreement outlined in its bankruptcy exit plan that reorganizes the debt the city owes to its other large creditor, bond insurer National Public Finance Guarantee Corp.

National had sued for access to California motor-vehicle license fees that backed $4.8 million of defaulted 1999 COPs. Under the agreement, National will get reduced and restructured payments for more than a decade and access to vehicle license fees through a state intercept program meant to help secure debt. The city will also have to pay National’s legal fees.

“The bondholders in this case have lost nothing,” Levinson said.

He noted that holders of the 1999 COPs have not been hurt because of the insurance from National, while the holders of the 2001, 2002 and 2003 certificates lost nothing because Union Bank paid them back in full.

No other bonds tied to the city, such as through restricted funds, have been affected by the bankruptcy.

The proposed debt restructuring also sets aside a pool of $6 million to pay unsecured creditors — mostly union members, retirees and general liability claims — an estimated 5% to 20% of their claims over two years, according to court documents filed in U.S. Bankruptcy Court for the Eastern District in Sacramento.

Levinson said the exact percentage that will be paid back to unsecured creditors is still unclear because hundreds of million of dollars of claims have been filed and need to be sorted out.

 “The city does not like it,” Levinson said. “It would like to pay everybody everything, but it would also like to keep police on the street.”

The legal plan is based on a five-year road map approved by the City Council that tackles $195 million in unfunded pension obligations, cuts payments for retiree health care, reduces pension benefits for new employees, raises pension contributions for current workers, and creates a rainy-day fund.

The next hearing in the bankruptcy case will address approval of Vallejo’s disclosure statement that outlines the exit plan in simpler terms. It is scheduled for March 7. The plan could be approved as early as June but may take longer, according to city officials.

Vallejo has solicited comments on the plan’s disclosure statement. The statement will likely be amended to incorporate the comments and presented to Judge Michael McManus. Creditors will eventually vote on the plan and the judge will decide on how to resolve issues raised by those who vote against the city before giving his approval.

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