SAN FRANCISCO, Oct 14 (Reuters) - Moody's Investors Service lowered the pension obligation bonds of Stockton, California, to 'Ca' from 'Caa3' on Monday and changed its outlook on them to negative from developing, citing how the city would treat the debt in its plan for exiting bankruptcy.
"For the series 2007 pension obligation bonds, the city is proposing significant losses to bondholders," Moody's said in a statement, noting that it now estimates losses to be in a range of 50 percent to 65 percent of principal from the date the city first defaulted on the debt.
"While better than the city's initial proposal of losses of around 80 percent, the projected losses are somewhat greater than had been implied at the former Caa3 rating level," Moody's said, noting the losses would accrue to bond insurer Assured Guaranty rather than to bondholders.
Stockton has settled with Assured and bond insurers Ambac and National Public Finance Guarantee Corp and is trying to reach deals with a handful of remaining creditors to support its plan to adjust its debt and exit from bankruptcy.
Assured and National led the opposition to Stockton's restructuring efforts, notably the city's plan to keep its pensions intact while forcing losses onto bondholders, which had raised concerns in the U.S. municipal debt market.
Moody's said it also changed its rating outlook for Stockton's 2006 lease revenue bonds to developing from negative, while affirming the debt's Caa3 rating.
Stockton's plan to adjust its debt to exit from bankruptcy "calls for the series 2006 lease revenue bonds to be paid in full, without interruption in debt service," Moody's said.
Stockton, a city of about 300,000 residents in California's Central Valley, filed for bankruptcy in June 2012, becoming the biggest city to do so until Detroit filed earlier this year.
Stockton officials on Thursday filed their plan for adjusting the city's debt to exit from bankruptcy with the judge hearing its case.
The plan assumes Stockton's voters will approve a proposed sales tax increase next month to help restructure the city's finances. To repair its finances, Stockton has also slashed spending and payrolls and is eliminating its health program for its retired employees.