SAN FRANCISCO — Wells Fargo NA plans to seek “remedies” after Stockton, Calif., failed to make lease payments that secure bonds, which could result in the city losing control of a building slated at one time to become its City Hall.
If the bank goes to court and prevails, it could be the second time Stockton loses control of property because of missed payments as it tries to avoid filing for bankruptcy.
Stockton, a city of around 300,000 in the state’s Central Valley, is trying to keep from filing for Chapter 9 bankruptcy by negotiating with creditors under a new California law meant to help local government avoid filing for protection from creditors.
The bank, which is the trustee for the debt, has served the city with a notice that said it will “exercise certain remedies” under the lease agreement after Stockton failed to make a lease payment on April 26 on variable-rate lease revenue bonds issued the city’s public financing authority in 2007, according to a filing with the Municipal Securities Rulemaking Board.
The troubled European bank, Dexia, provided liquidity on the bonds.
Since the city failed to make the lease payment that supports the bonds, its public financing authority failed to make an interest payment of more than $200,000 due on May 1, resulting in a default, the bank said.
According to the lease agreement, Wells Fargo is entitled to appoint a receiver to collect the lease revenues. The property in question is the 250,000-square-foot Chase Bank Building on 400 East Main Street, which had been earmarked as the future city hall, and a 518-space underground parking garage.
Neither Wells Fargo nor its lawyers were able to respond to requests for comment by press time Friday.
In April, the bank successfully sued in superior court to have three of the city’s parking garages put into receivership after Stockton failed to make debt service payments on $30 million of lease revenue bonds insured by National Public Finance Guarantee Corp. As trustee, Wells Fargo filed the complaint at the behest of National.
Connie Cochran, a spokeswoman for Stockton, said city officials were unsure what the bank’s actions will entail but they should know more this week.
Wells Fargo said in the filing that it drew on Assured Guaranty Corp.’s insurance policy backing the two series of bonds to make the payment to bondholders, and at the direction of Assured, it will move ahead to claim revenues.
A spokeswoman for Assured confirmed it is working with the bank to seek legal recourse.
The two defaults resulted from the City Council’s vote last month to suspended payments on three bond issues, totaling $110 million in par value, through the end of its fiscal year ending June 30.
The council also voted on Feb. 28 to begin a confidential mediation process with creditors under terms of a new state law, AB 506, designed to give financially stressed local governments a chance at staying out of bankruptcy.
Stockton’s financial problems have led to “super-downgrades.” Moody’s Investors Service has dropped the city to Ba2 from Baa1 since it announced it would default on debt and it is on the edge of bankruptcy. Standard & Poor’s has dropped the city to “selective default” after successive downgrades from A-minus.
