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

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

However, Klein did concede that at some point the city will haveto make adjustments in its pension obligations before emerging frombankruptcy.

Bond insurer National Public Finance Guarantee Corp. holdsapproximately $224 million in insured exposure with the city ofStockton. The city's general fund backs $89 million of thatexposure.

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

Reacting to the judge's decision, both companies say theydisagree with the ruling primarily because the city has notrelieved its pension obligations with the California PublicEmployees Retirement System (CalPERS).

“Stockton's significant fiscal problems can only be resolvedwhen CalPERS works cooperatively with other interested parties toput the city on a path toward long-term financial stability,” saysKevin Brown, a spokesman for National.

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

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