A federal bankruptcy judge's decision yesterday to approve the Chapter 9 bankruptcy of Stockton, Calif., increased the possibility that two bond insurers may have to make good on the $380 million in exposure they hold with the city.

Yesterday, U.S. Bankruptcy Court for Eastern District of California Judge Christopher Klein approved the Chapter 9 bankruptcy protection for Stockton filed in June of last year. In his ruling, the judge was critical of both bondholders and the insurers for opposing the city's petition and not working to resolve debt issues in good faith.

However, Klein did concede that at some point the city will have to make adjustments in its pension obligations before emerging from bankruptcy.

Bond insurer National Public Finance Guarantee Corp. holds approximately $224 million in insured exposure with the city of Stockton. The city's general fund backs $89 million of that exposure.

Bond insurers cover debt-service payments the insured may miss on its municipal bonds. National said that holders of Stockton city bonds covered by its insurance will receive scheduled interest and principal payments on time and in full.

Reacting to the judge's decision, both companies say they disagree with the ruling primarily because the city has not relieved its pension obligations with the California Public Employees Retirement System (CalPERS).

“Stockton's significant fiscal problems can only be resolved when CalPERS works cooperatively with other interested parties to put the city on a path toward long-term financial stability,” says Kevin Brown, a spokesman for National.

“Assured Guaranty has a substantial interest in seeing the city emerge from its financial predicament as a viable and sustainable government enterprise for the long term,” Assured says in a statement. The company notes that the city's residents and stakeholders would benefit “from a consensual approach” that would resolve the city's financial issues and treats all stakeholders “in a fair and equitable manner.”

In a filing with the Securities and Exchange Commission, Assured Guaranty Ltd. said in June, shortly after Stockton filed for bankruptcy, its exposure was $158 million. In December it paid $9 million in claims.

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Insurers Hold $380M Exposure in Stockton Bankruptcy

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