SAN FRANCISCO, Aug 9 (Reuters) - The recent bankruptcy filing by San Bernardino, California, underscores the financial stress faced by cities in the state and the potential that more might seek Chapter 9 protection from their creditors, Moody’s Investors Service said on Thursday.
San Bernardino is the third city in the most populous U.S. state to file for bankruptcy since late June, following the example of larger Stockton and the mountain resort town of Mammoth Lakes.
The filings have many in the municipal debt field expecting other financially distressed municipalities in California to consider bankruptcy as a way to renege on obligations.
“San Bernardino’s bankruptcy is not a sign of systemic risks in the municipal market, but the filing does signal the level of distress and potential for an increase in bankruptcy filings, particularly among California cities,” Moody’s said in a report.
“The recent uptick in bankruptcy filings in California could signify not only a lack of ability, but a lack of willingness to pay debt service at the expense of other financial obligations,” Moody’s said.
If municipalities begin to view bankruptcy as a “palatable solution” for financial troubles that would be a “major negative paradigm shift for the municipal sector to the detriment of bondholders,” Moody’s said.
“It may signal a diminution in the traditional stigma attached to bankruptcy and a shift in how cities regard the sanctity of debt service obligations.”