Stockton, Ambac Cap Payments on $21.6 Million in Debt

Feb. 26 (Bloomberg) -- The city of Stockton, California, announced the first agreement with one of its capital market creditors, just hours before facing hostile bond insurers in bankruptcy court.

Stockton and Ambac Assurance Corp. agreed to cap payments from the city’s general fund, which pays for most city services, such as fire and police protection, on $21.6 million in debt, officials said in a statement.

The deal, “will serve as an important step to enabling the city to emerge from bankruptcy and reach fiscal sustainability,” City Manager Bob Deis said in a statement.

Stockton is due in court today to face bond insurers and creditors who want a judge to throw the city out of bankruptcy. U.S. Bankruptcy Judge Christopher M. Klein scheduled the hearing to help him decide how to handle the challenge to the city’s eligibility for bankruptcy.

Stockton filed for court protection last year after failing to reach agreement on how to reduce its debt.

Under Chapter 9 of the U.S. Bankruptcy Code, governments, unlike corporations, must first prove to a judge that they are eligible to be in bankruptcy before they can use the court process to reduce debt through actions such as canceling contracts.

Pension Bonds

Assured Guaranty Corp., which insured about $161 million in pension obligation bonds, said in court papers in December that Stockton should raise taxes, cut employee benefits and close or sell city hall to repay bondholders. The city has said it can’t fully repay the bonds.

National Public Finance Guarantee Corp. also asked Klein to dismiss Stockton’s bankruptcy case, arguing that the city is unfairly forcing creditors to take excessive cuts. In its filing, the company repeated its argument that the city should force cuts on its biggest creditor, California Public Employees’ Retirement System.

The case is In re Stockton, 12-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).

-- Editors: Michael Hytha, Mary Romano

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net