Oct. 4 (Bloomberg) -- Stockton, the bankrupt California city, will give an office building it had planned to use as a new city hall to Assured Guaranty Corp. as part of a deal to end their fight over how to restructure $164.7 million in bonds the company had insured.
Assured already has control of the building and would gain ownership as well under a proposed agreement, Connie Cochran, a spokeswoman for the city, said in a phone interview. The deal was presented to the city council yesterday at a special meeting on Stockton’s bankruptcy-exit plan.
The council voted to authorize the city manager to file the plan with the U.S. Bankruptcy Court in Sacramento, California. For the settlement to become final, city voters must approve a sales-tax increase next month and a federal judge must approve the exit plan, Assured said.
“The settlement includes a unique and innovative instrument that enables Assured to participate in the city’s future revenue growth,” the Hamilton, Bermuda-based company said yesterday in an e-mailed statement.
The proposed deal is designed to give Assured the opportunity to recover all the money it may need to spend to guarantee that bondholders owed about $155 million will receive their principal and interest payments on time, said Robert Tucker, managing director of investor relations for Assured.
“The settlement provides for us the opportunity to be made whole,” Tucker said today in an interview.
The settlement would be part of the city’s bankruptcy-exit plan, known as a plan of adjustment. Two types of debt are covered by the deal: pension obligation bonds and lease revenue bonds related to the city office building.
By taking ownership of the building, Assured may be able to achieve a full recovery on $35 million of lease revenue bonds, either by using money collected from leasing the building or by selling it, Tucker said.
The settlement also would allow the city to stretch out payments to Assured Guaranty on $120 million in pension obligation bonds until 2052, from the original end date of 2038, by guaranteeing payment in cash.
Assured said the cash payments are valued at 73 percent of the nominal principal and interest owed on the bonds. The city estimated the payments are worth about 51 percent of the net-present value, a measure taking into account the decline in the payments’ value as they are stretched out over time.
Assured also would collect contingent payments on the pension bonds when city revenue exceeds a certain threshold. The revenue streams give Assured a chance to recover all payments made to bondholders under the insurance policy.
Under the city’s plan to exit bankruptcy, bondholder Franklin Resources Inc. would have the option of settling with the city or taking control of a park and two golf courses that were pledged as collateral for $35.1 million the company is owed. The city says it can only pay $500,000 of the $2.9 million it owes every year on the bonds.
In addition to cutting some debt, the plan relies on voters approving the sales tax, which would raise about $28 million a year. If voters reject the increase, the city would have to cut $11 million from services, according to a staff report. Before the bankruptcy, Stockton reduced services and its employee rolls, including police officers.
Stockton, an agricultural center of 296,000 about 80 miles (130 kilometers) east of San Francisco, is among at least three municipalities that have said they will ask creditors including bondholders to take less than the principal they are owed. The others are Detroit and Jefferson County, Alabama.
Under the Assured deal, the city will pay $250,000 a year starting in 2023 on $124.3 million in pension obligation bonds insured by Assured. Starting in 2042, the payments will increase to $350,000 until 2052 when the payments end, according to a city slide presentation provided by Cochran.
The case is In re Stockton, 12-bk-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).
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