A leading credit ratings and debt research firm downgraded the city of Stockton’s rating in the wake of a vote earlier in the week that took the city another step toward filing for Chapter 9 bankruptcy protection.
Moody’s on Wednesday downgraded the general fund-supported ratings of the city and confirmed the ratings on the city’s enterprise and special tax debt, according to a Moody’s statement.
“The outlook on these bonds is negative,” the statement read.
The move comes after Tuesday’s vote by the Stockton City Council to approve several resolutions that move the city closer to filing for bankruptcy protection (“City Council vote moves city closer toward Chapter 9,” Central Valley Business Journal, June 27, 2012). The move came as the city continued to see a $26 million deficit in its general fund.
“Moody’s rating action on the city’s general fund supported bonds reflects the city’s June 26 adoption of a budget that would suspend payments on some of its lease and pension obligation bonds backed by its general fund in fiscal 2013 in order to close an approximately $26 million budget gap,” reads Moody’s statement.
“The rating action also incorporates the city’s announcement that it will likely file for bankruptcy protection after the failure of a three-month mediation process with its creditors,” the statement continued. “The … rating level assumes losses to bondholders will be greater than 20 percent. The negative outlook reflects the high likelihood that losses could exceed our estimates.”
The statement went on to indicate that the proposed 2013 fiscal year budget relies heavily on suspending a $12 million debt service, about 46 percent of the city’s budget solutions.
“The city is running out of cash and faces limited time and options to fix its structural imbalance,” continued the statement.
The extend of the budget gap and the reliance on the debt service reductions as part of the city’s budget solutions is “an indication of the likelihood of a high level of losses that the city’s pension obligation and lease bonds would experience in bankruptcy. Under the bankruptcy code, these bonds would be treated as unsecured debt and would likely be subject to restructuring and losses in order to facilitate a recovery,” continued Moody’s.
The rating could go up for the pension obligation and lease revenue bonds if the losses turn out to be less than assumed at this point and the structural balance in the city’s budget is restored. Continuing the debt service payments in full and proof that bondholders will receive the full value of their principal is needed for an uptick in the rating for the city’s enterprise and special tax bonds.