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.[Image courtesy of Shutterstock.com]