Moody's lowers Stockton, Calif., pension bonds deeper into junk


SAN FRANCISCO, Oct 14 (Reuters) - Moody's Investors Servicelowered the pension obligation bonds of Stockton, California, to'Ca' from 'Caa3' on Monday and changed its outlook on them tonegative from developing, citing how the city would treat thedebt in its plan for exiting bankruptcy.

"For the series 2007 pension obligation bonds, the city isproposing significant losses to bondholders," Moody's said in astatement, noting that it now estimates losses to be in a rangeof 50 percent to 65 percent of principal from the date the cityfirst defaulted on the debt.

"While better than the city's initial proposal of losses ofaround 80 percent, the projected losses are somewhat greaterthan had been implied at the former Caa3 rating level," Moody'ssaid, noting the losses would accrue to bond insurer AssuredGuaranty rather than to bondholders.

Stockton has settled with Assured and bond insurers Ambacand National Public Finance Guarantee Corp and is trying toreach deals with a handful of remaining creditors to support itsplan to adjust its debt and exit from bankruptcy.

Assured and National led the opposition to Stockton'srestructuring efforts, notably the city's plan to keep itspensions intact while forcing losses onto bondholders, which hadraised concerns in the U.S. municipal debt market.

Moody's said it also changed its rating outlook forStockton'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 infull, without interruption in debt service," Moody's said.

Stockton, a city of about 300,000 residents in California'sCentral Valley, filed for bankruptcy in June 2012, becoming thebiggest city to do so until Detroit filed earlier this year.

Stockton officials on Thursday filed their plan foradjusting the city's debt to exit from bankruptcy with the judgehearing its case.

The plan assumes Stockton's voters will approve a proposedsales tax increase next month to help restructure the city'sfinances. To repair its finances, Stockton has also slashedspending and payrolls and is eliminating its health program forits retired employees.

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