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Rating Action:

Moody's upgrades City of Stockton's (CA) lease-revenue bonds to Ba2 and affirms POB rating at Ca

28 Sep 2015

Outlook is stable for both 2006 lease bonds and 2007 pension obligation bonds

New York, September 28, 2015 -- Moody's Investors Service has upgraded to Ba2 from Ba3 the City of Stockton's (CA) series 2006 lease revenue bonds and affirmed the city's 2007 pension obligation bonds at Ca. We have also assigned a stable outlook to the Series 2006 and 2007 bonds. This rating action affects approximately $71 million of bonds.

SUMMARY RATINGS RATIONALE

Moody's rating actions on the city's 2006 lease revenue bonds and 2007 pension obligation bonds reflect in part, the treatment of these bonds' creditors as outlined in the city's plan of adjustment, which the bankruptcy court confirmed on October 30, 2014. Under Chapter 9 of the bankruptcy code, a municipality must issue and have confirmed a plan of adjustment before it can emerge from bankruptcy. Unless the confirmation is overturned on appeal, the confirmation locks into place Stockton's proposed treatment of its various creditors. Even though one creditor is appealing the confirmation with respect to the city's series 2009 certificates of participation, which series we do not rate, the holders of the series 2006 COPs and 2007 POBs agreed to the terms of the confirmation. As a result, the proposed treatment of these bonds is unlikely to change, although the uncertainty surrounding the outcome of the appeal is a significant factor in our rating.

For the series 2007 pension obligation bonds, the plan imposes significant losses to Assured Guaranty Municipal Corp ("Assured", A2 stable), the bond insurer. Moody's estimates these losses to be approximately 59% of principal from the date the city first defaulted on the series 2007 bonds. Investor recovery of at least 41% of principal is consistent with the Ca-rating recovery range of between 35%-65% of principal. Under the plan, Assured will receive annual payments from the city from various sources. The city has deemed these payments "non-contingent." Assured may receive additional, "contingent" payments tied to the performance of the city's future revenues, which would increase bondholder recovery. Our analysis only considers these "non-contingent" payments, although Assured could receive a higher recovery if the city exceeds certain performance benchmarks beginning in FY 2018.

For the Series 2006 lease-revenue bonds, the bankruptcy did not have an impact either on investor debt service payments or principal repayment and the payment of debt service has continued uninterrupted. The plan of adjustment treats this obligation as unimpaired. Therefore, the Ba2 rating reflects our forward-looking evaluation of the city's credit fundamentals, tax base, financial position and debt, including the lease-revenue pledge versus California's general obligation pledge, and the city's recent bankruptcy. The city's actions taken in connection with its bankruptcy filing to impair a significant portion of its debt raises the risk that it would consider impairing the Series 2006 debt in the event of a subsequent bankruptcy filing, although the risk of such a bankruptcy is becoming increasingly more remote with the city's much improved financial position.

The debt service reductions and other actions to reduce expenditures, including the elimination of retiree medical benefits, have had and will continue to have a positive effect on the city's budget. The city has posted budget surpluses each year since 2011, despite declaring bankruptcy in 2012, and credibly projects surpluses at least through 2016. Fund balances and cash reserves are also growing. The city's economy is improving, with key revenues increasing as a result of asset appreciation and increases in underlying economic activity. The city's pre-bankruptcy debt levels were high. The vast majority of the debt consists of lease-revenue or pension-obligation debt, which, before the bankruptcy, were unconditional promises of the city. Going forward, the majority of the city's debt that has not been discharged by the bankruptcy plan will paid from dedicated sources; if those sources are insufficient to repay the new obligations, the city will not be obligated to repay those obligations.

The Ba2 rating for the city's 2006 lease-revenue debt reflects a significantly weaker assessment than under a general obligation pledge. Under California law, a city's GO pledge is an unlimited ad valorem pledge of the city's tax base. The city must raise property taxes by whatever amount necessary to repay the obligation, irrespective of its underlying financial position. A lease pledge is a contractual obligation, on parity with a city's other unsecured obligations, backed by the city's available financial resources. The difference between a GO and lease-revenue pledge also reflects the additional risk to investors from the city's financial, operational and economic condition over the more secure GO pledge A California municipality's lease revenue pledge is relatively less secure than our prior estimates, both in terms of probability of default and likely losses in the event of default.

OUTLOOK

The stable outlook on the city's lease revenue bonds reflects likely improvements in the credit profile of the city over the next two years, given the improving local economy and the city's commitment to maintaining fund balance levels that are well above median reserve levels for the rating category. If Stockton prevails in the pending appeal of its plan of adjustment, this would also remove a significant source of uncertainty and result in further upward pressure on the rating.

The stable outlook on the city's 2007 POBs reflects the likelihood that the rating will not change over the next 2-3 years since we do not expect a significant change in the expected rate of recovery in the short term. The city's agreement with Assured Guaranty provides that the city may be liable for additional debt service payments to Assured beginning in FY 2018, which could increase bondholder recovery if the city's financial position improves materially. Therefore, the rating currently reflects the recovery level to bondholders for the near- to medium-term.

WHAT COULD MAKE THE RATING GO UP

- Trend of operating surpluses and increasing reserve levels

- Continuing improvements in the local economy, including a significant increase in key socio-economic indicators

- Further increases in the city's tax base

WHAT COULD MAKE THE RATING GO DOWN

- Return to recession of the local economy, resulting in declines in key revenue sources

- A trend of operating deficits and further narrowing of reserve levels

- Declines in key socio-economic indicators

OBLIGOR PROFILE

With a population of approximately 300,000, Stockton is California's thirteenth's largest city and the largest city in San Joaquin County.

LEGAL SECURITY

For both the lease-revenue and pension obligation bonds, the city's obligation consists of an unconditional obligation to make the underlying lease or pension obligation payment from all legally available sources.

USE OF PROCEEDS

Not applicable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was US Local Government General Obligation Debt published in January 2014. An additional methodology used in these ratings was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gregory W. Lipitz
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Alexandra J. Cimmiyotti
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades City of Stockton's (CA) lease-revenue bonds to Ba2 and affirms POB rating at Ca
No Related Data.
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