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SAN FRANCISCO (Reuters) – The city of Stockton, California, faces a growing likelihood of defaulting on some of its debt obligations as the conclusion of confidential talks with its creditors aimed at averting bankruptcy nears, Moody’s Investors Service said on Wednesday.
Stockton is in mediation with its creditors, trying to obtain concessions to help close a $26 million budget gap before the July 1 start of its new fiscal year.
“The city’s ratings, even on secured obligations, could be subject to further downgrades in a bankruptcy,” Moody’s said.
The law requiring mediation was approved in response to Vallejo, California‘s controversial bankruptcy filing in 2008. Vallejo emerged from bankruptcy last year.
Stockton‘s restructuring plan includes mediation and, to the shock of many in the U.S. municipal debt market, defaulting on some debt payments during the remainder of the current fiscal year through June.
“Since the mediation will conclude at the end of June, the parties involved will have very little time to ratify agreements before the city becomes insolvent,” Lipitz said.
Separately, a Moody’s report said Stockton “will likely chose to file for Chapter 9 bankruptcy primarily because the city says that it will run out of cash on July 1 and has indicated that it will file for bankruptcy if negotiations with creditors fail to provide material concessions.”
“Even if a bankruptcy filing is avoided through negotiation of a settlement with labor unions, bondholders, or a combination of the two, Stockton is likely to default on its unsecured debt, including pension and lease obligations,” the report added.
Moody’s said it expects Stockton‘s enterprise debt and special tax bonds to be considered special revenue obligations protected from default and loss of principal in bankruptcy.
(Reporting by Jim Christie, Editing by G Crosse)
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