Bankrupt San Bernardino, California, reaches deal on pension obligation debt

SAN FRANCISCO (Reuters) - The bankrupt city of San Bernardino, California, said in a court filing on Wednesday it had reached a tentative agreement with the creditor holding its pension obligation bonds on how the debt would be treated in the city’s plan to exit bankruptcy but did not provide details.

San Bernardino in its filing in U.S. Bankruptcy Court for the Central District of California said the deal was struck on Jan. 5 and that it was working to document terms, which remain confidential for now.

The city, which filed for bankruptcy in 2012, had been planning to pay $655,000 plus interest on nearly $50 million in pension obligation bonds held by a Luxembourg-based bank.

The bank, Erste Europaische Pfandbrief-und Kommunalkreditbank AG, had been at the forefront of fighting San Bernardino’s plans to adjust more than $150 million in claims.

The disclosure of the agreement follows a vote on Monday by San Bernardino’s Common Council to approve a settlement ending disputes involving more than $40 million in claims with the city’s firefighters, a move the city said it expected would advance the plan it is drafting to exit bankruptcy.

The agreement endorsed unanimously by the council clears the way for the city to fold its fire department into San Bernardino County’s fire services district as a critical cost-cutting measure.

The settlement resolves nine years of claims against San Bernardino. It includes paying the firefighters $2.7 million to resolve claims over changes to the city’s pension policy and to settle lawsuits the firefighters pressed against the city after it filed for Chapter 9 bankruptcy protection.

The agreement also provides for the firefighters’ union to be treated as an unsecured creditor that would get $140,000, or 1 percent, on a $14 million claim in the city’s bankruptcy plan.

Stockton, California’s Chapter 9 bankruptcy, also launched in 2012, came to an end last month when its final hold-out creditor dropped its fight after a bankruptcy appellate panel rejected a bid to reverse the city’s restructuring plan.

Two Franklin Templeton Investments funds had loaned Stockton about $35 million and ended up with less than $7 million in the reorganization approved nearly a year ago by a bankruptcy judge.

The cases of Stockton and San Bernardino, along with Detroit’s landmark bankruptcy case, have been closely followed by the municipal bond market.

Bondholders were concerned about the potential for being forced to accept more limited recoveries compared with other creditors, notably pensioners.