Stockton faces off with remaining creditors today

Reuters reports Stockton, a city of nearly 300,000, which became the most populated city in American history to declare bankruptcy two years ago, is scheduled to face off against one of their creditors this week. Experts suggest it could be a landmark hearing this week as the rights of impaired bondholders are pitted against retirees and other creditors.

Franklin Templeton rejects repayment plan

Investment firm Franklin Templeton has objected to Stockton’s Chapter 9 bankruptcy plan arguing the repayment plan would effectively eliminate the debt they are owed while not reducing payments to employee pension plans and treating other creditors with a similar priority status in a more favorable position, which is not allowed under bankruptcy law.

If Franklin Templeton loses and the court rules against their objection, Franklin High Yield Tax-Free Income Fund and Franklin California High Yield Municipal Fund would receive less than a penny on the dollar.

“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.”

Bond market watching Stockton decision

Stockton’s Chapter 9 bankruptcy is similar to several other cases around the country. If the court decides the unmanageable pension obligation should be repaid but they allow other debts to be cut, experts argue the bond market could be shaken. Bonds which have traditionally been a sound investment could take a hit.

Bonds are used to generate funds by state and local governments to raise money to pay for everything from new roads to schools and are currently a $3.7 trillion market, but investors may not feel as comfortable investing in bonds in the future if they do not feel equally protected by bankruptcy courts.

Stockton’s bankruptcy case is minute compared to the case which is currently being reviewed in Detroit. In fact, Stockton’s $26 million pales in comparison to Detroit’s $18.5 billion case, but the issues for the two cities are similar. Both cities are debating how much they can cut from state government pension plans and how much money bondholders are willing to accept for repayment.

Bankruptcy court will determine if Stockton’s plan is fair

Stockton’s repayment plan will be reviewed in a span of four days beginning today. U.S. Bankruptcy Court Judge Christopher Klein will decide if the plan is “feasible and fair” by reviewing the dispute with Franklin. At issue is whether the $94,000 which would be repaid to Franklin for their $35.1 million loan is fair while other creditors will receives 52 to 100 percent of their claims. The plan also fails to address the pension liabilities for the city. A move Franklin argues is unfavorable to them.

“The city seeks to cram down a plan of adjustment that essentially provides Franklin with no recovery whatsoever,” the creditor wrote in February.