SAN FRANCISCO — Vallejo, Calif., hasn’t quite wiggled out of bankruptcy, nearly two months after getting a judge’s approval for its exit plan.

The city is still finalizing contract details for its largest bondholder and creditor, Union Bank, owner of $45 million of Vallejo’s certificates of participation.

Marc Levinson, the city’s bankruptcy lawyer and a partner at Orrick, Herrington & Sutcliffe, said none of the financial terms with Union Bank outlined in the bankruptcy exit plan are in question.

“I want to stress — everyone, I believe, everyone is negotiating in good faith. We are trying to get it done, but there are just disagreements,” he said. “These are important issues and we are going to be living with these documents for 40 years.”

In the first week of August, U.S. Bankruptcy Judge Michael McManus in Sacramento signed the order confirming the debt-restructuring plan, which will slash some bondholder principal by almost 50% and unsecured claims by 80% or more.

Levinson said that if “everything goes well,” Vallejo could finish up the negotiations over the technical legal issues with the bank in the next few weeks and would then submit the documents to the City Council for approval.

Once the council approves the contracts, the city will technically be out of bankruptcy, Levinson said, though there are still many loose ends that must be tied up.

Robert Stout, Vallejo’s director of finance for most of the bankruptcy and now a consultant, said during The Bond Buyer California Public Finance Conference this month that the city has already spent $12 million on the Chapter 9 filing, which includes paying for Union Bank’s lawyers.

Vallejo, which has a population of 120,000, filed for bankruptcy in May 2008 after three years of deficits caused by dwindling tax collections and what it called unsustainable labor contracts. It is the largest municipal bankruptcy in California since Orange County’s in 1994.

The city now has around one-third fewer employees and has cut into pension and medical benefits costs.

The final restructuring plan calls for Union Bank to take a 47% haircut on four series of general fund-supported COPs. Part of Vallejo’s debt payments to National Public Finance Guarantee Corp., an insurer of a small share of the bonds, will be deferred a year with an interest rate of 5.25%, which is 1% to 2% below the pre-bankruptcy rate.

Vallejo’s restructuring leaves bonds backed by specific revenues untouched.

Unsecured creditor claims, those without collateral, will be paid out of a pool of $5.9 million over two years. The mostly union members and retirees will get paid roughly 5% to 20% of their initial claims. Vallejo received more than 900 general unsecured claims, totaling $262 million.

Many of the general unsecured claims stem from the city’s rejection of collective bargaining agreements with unions during the move to bankruptcy. Police and fire union employee costs make up the majority of the city’s general fund expenses.

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