California City and Assured Guaranty Reach Bankruptcy Exit Deal

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Stockton, Calif. and Assured Guaranty have reached an agreement to restructure more than $150 million of outstanding debt to help the city exit from bankruptcy, a top city official and the bond insurer said.

Under the terms of the agreement, Assured will take possession of a city building and receive the revenue it generates to service about $35 million in outstanding bonds that Stockton had sold to acquire it.

“The settlement includes a unique and innovative instrument that enables Assured to participate in the city’s future revenue growth,” the bond insurer said in a statement confirming the agreement.

It also allows Stockton, which filed for bankruptcy last year, to make payments on about $120 million in outstanding pension obligation bonds until 2052 from their original 2038 term.

At a Stockton city council meeting to take up the city’s plan to adjust its debts to exit from bankruptcy, City Manager Bob Deis said the deal should put Stockton on track to exit Chapter 9 municipal bankruptcy in about six months.

“Now we have deals with every bond insurer that’s involved in the bankruptcy process,” Deis said.

Stockton’s deal with Assured is subject to conditions, notably that city voters approve a measure to increase the city’s sales tax in November to raise additional revenue and that the bankruptcy court hearing Stockton’s case confirms its plan to adjust its debt.

Assured and fellow bond insurer National Public Finance Guarantee led efforts by Stockton’s so-called capital markets creditors to block the city’s bankruptcy case, saying city pensions managed by the California Public Employees’ Retirement System should have been treated like other debt.

Last week Stockton released a draft plan for adjusting its debt that disclosed a deal with National over about $45 million in outstanding lease revenue bonds for the city’s arena whose payments will be cut by 3 percent. Other bonds insured by National and related to parking garages will be cut by 12 percent, while a third bond for a city building will be paid in full.

With about 300,000 residents, Stockton set itself apart in bankruptcy proceedings from Detroit, which has filed the largest U.S. municipal bankruptcy, and smaller San Bernardino, California, which filed for bankruptcy last year, because it has insisted on leaving pension payments intact.

Stockton defended its pensions, and California’s $268 billion pension fund for public employees was prepared to back that in bankruptcy court, by stressing that cuts to services, its payroll and benefits would help restructure its finances.