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Tags: muni | stockton | california

Analyst: California May Be 'Flash Point' for Muni Bankruptcies

Monday, 27 February 2012 04:28 PM EST

The California city of Vallejo's trip to municipal bankruptcy court in recent years and the possibility that the cities of Stockton and Hercules may land there as well could force other issuers in the state to pay a penalty in the market, a municipal analyst said on Monday.

"I'm starting to get a little concerned that California is becoming the flash point for municipal bankruptcies," said Dick Larkin, senior vice president and credit analysis director at Herbert J. Sims & Co in Iselin, New Jersey.

He pointed to New York City's fiscal problems in the 1970s that forced interest rates higher on other debt that carried the city's name, and the Washington Public Power Supply System's huge bond default in the 1980s, which did the same to other Washington state issuers .

On Friday, Stockton, a city of 292,000 located about 85 miles east of San Francisco, announced that officials would take up a plan on Tuesday to suspend about $2 million in debt service payments due March 1 as part of a broad restructuring of city finances to avoid becoming the biggest U.S. city to declare bankruptcy.

Stockton, plagued by high debt service payments and sinking revenue, would also begin a process required by a new California law under which it would seek a settlement with its creditors. However, the city, in a material event filing on Friday, said no assurances can be given that bankruptcy would ultimately be avoided.

Vallejo's bankruptcy in 2008 made national headlines and put a spotlight on other financially troubled cities in the most populous U.S. state. Earlier this month, Standard & Poor's Ratings Services slashed Hercules' credit ratings, citing bankruptcy talk and a technical default on some bonds.

Stockton's credit ratings went into a freefall on Friday, with Moody's Investors Service lowering the city to a below-investment-grade Ba2 from Baa1 and downgrading other ratings affecting about $341 million of debt.

Standard & Poor's Ratings Services also dropped the city's issuer credit rating into the junk level of BB from A-minus, while ratings on appropriation and pension debt fell a notch further, to BB-minus from BBB-plus. S&P also put the ratings on a watch list for possible further downgrades.

The state of California will be in the $3.7 trillion U.S. municipal market this week with $2 billion of general obligation refunding bonds through underwriter J.P. Morgan Securities. But Larkin said he does not expect the deal to be affected by the bankruptcy concerns because the state has cut back on debt issuance, creating pent up demand for its paper.

But he noted: "At some point issuers in California will start paying the price."

That possibility was also brought up by California Treasurer Bill Lockyer, who said on Friday that bankruptcy's "reputational stain can bleed onto other local issuers and the state and that can hurt taxpayers in the bond market."

In Monday's secondary market for munis, prices ended unchanged to slightly higher, easing the yield on 10-year bonds 2 basis points to 1.85 percent on Municipal Market Data's benchmark triple-A scale. Thirty-year yields also fell 2 basis points to 3.23 percent, according to MMD, a unit of Thomson Reuters.

© 2023 Thomson/Reuters. All rights reserved.

Monday, 27 February 2012 04:28 PM
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