May 11 The bankrupt city of Stockton,
California, will face off against a holdout creditor this week
in a closely watched municipal bankruptcy case pitting the
rights of impaired bondholders against retirees and other
At issue is whether the northern California city, which
filed for Chapter 9 bankruptcy protection almost two years ago,
can effectively wipe out the claims of one creditor while
treating others far more favorably and leaving city employee
The main objector to the city's plan of adjustment is the
investment firm Franklin Templeton, whose Franklin High Yield
Tax-Free Income Fund and Franklin California High
Yield Municipal Fund would receive less than a penny
on the dollar.
"It's going to be a real, serious, issue-raising trial,"
said David Tawil, president of Maglan Capital, a hedge fund that
focuses on distressed situations.
"What we're finding now in municipal bankruptcies is the
pensions - the obligations which are the most onerous - don't
get touched," said Tawil. "The judge is going to have to say
that [Stockton is] not touching the largest debt pool and,
nonetheless, this is still a feasible plan."
Stockton's case is one of a handful of municipal
bankruptcies playing out across the country that highlight the
tensions between unmanagable pension obligations and other debts
owed by distressed cities. The cases are being closely watched
by investors in the $3.7 trillion municipal bond market, where
state and local governments raise money to pay for everything
from new roads to schools.
In terms of debt to be reorganized, Stockton's $26 million
pales in comparison to Detroit's $18.5 billion case, which is
expected to come to trial this summer. In southern California,
the city of San Bernardino, with $46 million in debt, is in
court-ordered mediation with its largest creditor, California
Public Employees' Retirement System (Calpers).
During a four-day trial kicking off on Monday, U.S.
Bankruptcy Court Judge Christopher Klein is poised to determine
whether Stockton's exit plan is feasible and fair. He'll also
weigh the long-term burden of the city's pension obligations and
oversee the dispute with Franklin.
In court documents, Franklin argued the city's plan - which
would give Franklin $94,000 to cover a $35.1 million loan -
discriminates against it by treating other bondholders more
favorably. While others are expected to receive 52 to 100
percent of their claims, Franklin is looking at one-quarter of
one percent. The plan also forgoes addressing pension
"The city seeks to cram down a plan of adjustment that
essentially provides Franklin with no recovery whatsoever," the
creditor wrote in February.
Stockton counters that Franklin's suggestion that it cut
pension benefits would terminate its relationship with Calpers
and leave it with a $1.6 billion termination fee.
The city of 300,000 declared bankruptcy in June 2012, after
depleting its reserves as property tax revenue plunged. It has
slashed its workforce by 30 percent and cut its budget by $90
million. The city's plan eliminates about $1 billion worth of
(Reporting By Robin Respaut)