Stockton, California’s Insured Debt Proves Alluring

By JOan Gralla | June 29, 2012

About half of the $700 million of debt issued by bankrupt Stockton, California, is insured and a few traders have carried on some speculative purchases of its bonds, investors said on Thursday.

Stockton, a city of nearly 300,000 people located about 85 miles (135 km) east of San Francisco, filed for bankruptcy on Thursday evening. City officials said the city was insolvent and a debt restructuring needed.

The bankruptcy will shield Stockton from its creditors, including bondholders, who would have to rely on the insurance company to cash the interest and principal they were owed.

Prices of some of Stockton’s insured bonds have held up fairly well. Two blocks of $65 million o n Wednesday t raded at 82 cents on the dollar and 83 cents on the dollar, according to Municipal Market Data, which is part of Thomson Reuters.

Shawn O’Leary, a senior research analyst with Chicago-based Nuveen Asset Management, LLC, has already bought about $8 million of lease revenue bonds that are backed by National Public Finance Guarantee. The debt was attractively priced, he said.

“We bought it with the knowledge that bankruptcy was a probability,” he said by telephone. “We think we’ll have a full recovery on the insured paper,” he added.

National Public Finance Guarantee, which has insured about $224 million of Stockton’s debt, is owned by MBIA Inc.

Assured Guaranty Ltd. has insured $162 million of debt issued by Stockton.

The Nuveen analyst, in a report issued on Wednesday, said the insurer “has ample claims-paying resources to cover timely payment of interest and principal on the Stockton bonds it guarantees, and it has publicly affirmed it will pay, should that be required.”

Citigroup on Thursday offered to pay 86 cents on the dollar for some insured Stockton issues, a trader familiar with the matter. But an independent pricing service, Bedford, Massachusetts-based Interactive Data, on Wednesday valued the issues at 93 cents on the dollar, according to the trader.

Spokesman for Citi and Interactive Data declined comment.

Before the credit crisis, more than half of new municipal bonds that came to market were backed by insurance. But ruinous bets on mortgage securities cost the insurance companies the top credit ratings investors demand, and their market share crumbled.

Some municipal experts are still cautious about the insurers’ ability to fully repay interest and principal to bondholders if there is a default.