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UPDATE 2-Moody's sees rising odds of default by Stockton, Calif. Jun 14th 2012, 00:26 Wed Jun 13, 2012 8:26pm EDT (Adds details, background) SAN FRANCISCO, June 13 (Reuters) - The city of Stockton, California, faces a growing likelihood of defaulting on some of its debt obligations as the conclusion of confidential talks with its creditors aimed at averting bankruptcy nears, Moody's Investors Service said on Wednesday. Stockton is in mediation with its creditors, trying to obtain concessions to help close a $26 million budget gap before the July 1 start of its new fiscal year. If the California Central Valley city of 292,000 people 85 miles east of San Francisco cannot obtain sufficient concessions by the end of June, it may file for bankruptcy. "The city's ratings, even on secured obligations, could be subject to further downgrades in a bankruptcy," Moody's said. Stockton is the first big city in California to test a new law requiring mediation after its leaders in February endorsed a restructuring plan for the city's finances. The law requiring mediation was approved in response to the controversial bankruptcy filing of Vallejo, California, in 2008. Vallejo emerged from bankruptcy last year. Stockton's restructuring plan includes mediation and, to the shock of many in the U.S. municipal debt market, defaulting on some debt payments during the remainder of the current fiscal year through this month. Rating agencies have slashed Stockton's credit rating in response and the state controller office is investigating its financial practices. Moody's has a junk level Ba2 issuer rating on Stockton. Gregory Lipitz, a vice president and senior analyst at Moody's, said he is concerned Stockton is running out of time to balance it books. "Since the mediation will conclude at the end of June, the parties involved will have very little time to ratify agreements before the city becomes insolvent," Lipitz said. A spokeswoman for Stockton said she could not discuss the mediation, but said the city council remains hopeful the talks will help the city with its financial troubles. Stockton's revenue has plunged as a result of the recession and a crash in its once red-hot housing market. City officials have cut more than $90 million in spending over the past three years and have said the city is reaching a point where they cannot cut much more without endangering public safety. Stockton notched its 29th homicide of the year on Tuesday with the daytime shooting of a 23-year-old man in a city park, according to The Record, the city's daily newspaper. Separately, a Moody's report said Stockton "will likely chose to file for Chapter 9 bankruptcy primarily because the city says that it will run out of cash on July 1 and has indicated that it will file for bankruptcy if negotiations with creditors fail to provide material concessions." "Even if a bankruptcy filing is avoided through negotiation of a settlement with labor unions, bondholders, or a combination of the two, Stockton is likely to default on its unsecured debt, including pension and lease obligations," the report said. Citing Vallejo's bankruptcy experience, Moody's said investors holding Stockton's unsecured debt may see steep losses. Vallejo's unsecured bondholders suffered losses of at least 25 percent, Moody's said. With that in mind, a bankruptcy filing by Stockton could trigger a multi-notch downgrade of the city's pension obligation and leasehold bonds to the Caa category or lower, Moody's said. By contrast, Moody's expects Stockton's enterprise debt and special tax bonds to be considered special revenue obligations protected from default and loss of principal in bankruptcy. However, the debt would be subject to downgrades due to increased credit risk in the event of a bankruptcy filing, Moody's said. (Reporting by Jim Christie; editing by G Crosse and Mohammad Zargham) - Link this
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