March 27, 2013 / 5:45 PM / 6 years ago

Ruling on Stockton bankruptcy eligibility seen Monday

Shuttered and padlocked businesses line Main Street in Stockton, California June 27, 2012. REUTERS/Kevin Bartram

SACRAMENTO, California (Reuters) - A verbal ruling on whether Stockton, California, is eligible for bankruptcy protection will likely come next Monday, a federal judge said on the third and final day of a trial on the matter that the municipal debt market is closely watching.

Bankruptcy Judge Christopher Klein said he would need more time than anticipated to make a ruling over whether Stockton should be allowed to press on with its bankruptcy case, which could result in bondholders and bond insurers of the city swallowing losses while leaving pensions of city workers and retirees intact.

“I’m pretty confident I will not be in a position to make my findings by Friday,” Klein told attorneys for Stockton and its so-called capital markets creditors at the third hearing of the trial that started on Monday.

Stockton aims to aggressively impair its bond debt if found eligible for bankruptcy court protection, a strategy other cash-strapped municipalities could follow, breaking a tradition in the $3.7 trillion municipal bond market, which provides financing for various public capital projects, from school construction to sidewalk repairs.

Since at least the 1930s, bondholders in major municipal bankruptcies have consistently repaid their entire principal. If Stockton establishes it is eligible for bankruptcy protection, other financially troubled municipalities could follow its example and try to adjust debts through bankruptcy.

A city of nearly 300,000 in California’s Central Valley, Stockton filed for bankruptcy last year, becoming the biggest U.S. city to declare bankruptcy.

Bond insurers Assured Guaranty Corp, Assured Guaranty Municipal Corp and National Public Finance Guarantee Corp have been joined by Wells Fargo Bank, the Franklin California High Yield Municipal Fund and Franklin High Yield Tax-Free Income Fund in contesting Stockton’s bid for bankruptcy eligibility.

The insurers have more than $300 million of exposure to the city’s debt and have said that Stockton’s decision to keep current payments to its largest creditor, the California Public Employees’ Retirement System, showed lack of good faith during the initial stages of the city’s bankruptcy plan.

The $254 billion pension fund manages pension accounts for Stockton’s current and retired employees.

Editing by Paul Simao, Tiziana Barghini and Bob Burgdorfer

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