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Stockton's Junk Bonds Threaten Muni Market


Fresh off the news that Stockton, California doesn’t plan to touch a dollar of its pensions in its bankruptcy plan, Reuters reports that Moody’s has plunged the city’s pension bonds to the depths of junk status:

Moody’s Investors Service lowered the pension obligation bonds of Stockton, California, to ‘Ca’ from ‘Caa3’ on Monday and changed its outlook on them to negative from developing, citing how the city would treat the debt in its plan for exiting bankruptcy.

“For the series 2007 pension obligation bonds, the city is proposing significant losses to bondholders,” Moody’s said in a statement, noting that it now estimates losses to be in a range of 50 percent to 65 percent of principal from the date the city first defaulted on the debt.

Keeping unaffordable pension payments rolling while forcing bondholders to swallow losses is a trend that could wreck the municipal debt market. If bondholders are spooked and start to sense that the muni market is no longer a safe place in which to operate, then cities that desperately need to borrow will find far fewer creditors willing to work with them. Depending on how many bondholders get hosed in the bankruptcy deals made by Stockton, Detroit and others, struggling US cities may be in for even harsher times.

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  • bff426

    The losses on the bonds will be taken by Assured Guarantee and National Public Finance Guarantee, both insurers. The larger point of the effect on the muni market is correct. Already some cities can’t get insurance and are paying higher interest.

  • free_agent

    Though the Reuters story says, “Stockton … is eliminating its health program for
    its retired employees.” So the retirees are taking part of a haircut.

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