Just last week I observed here that the city of Stockton, California was on the verge of filing its Chapter 9 Plan of Adjustment. Well, it has but unless you have access to PACER you can't read it, at least not yet. The Plan runs 90 pages plus two "term sheets" of prospective settlements with the two bond insurers (the infamous "capital markets creditors") who have lead the fight against the city and its professed desire not to impair the claims of its retirees.
I'm pleased that one of my predictions came to pass. Look here, where I scoffed at the city's assertion that it would file a plan by the end of July. Of course, in the same post I expressed my belief that Stockton would not be able to reach a global settlement with its cantankerous bond insurers without cutting payments to retirees. That prediction was (not entirely) wrong. Stockton is not cutting pension payments; yet it has eliminated retiree health benefits. The retirees claim they're suffering a hit of over half a billion dollars. Stockton's Plan proposes to pay them slightly under 1% of that amount.
But what about the bond insurers? Did they cave in or simply come down from their original "non-negotiable" starting point of payment in full? More toward the latter if I've read the settlement term sheets and 95-page Disclosure Statement correctly. (I need someone with an M.B.A. in finance to figure out just how much of a haircut the bond insurers are taking; any volunteers?)
The insurers will get payments of most of what they're owed with a "profit-sharing" possibility for one of them that might lead to payment in full. Even if they're not getting toasted, why the move toward the middle? Three reasons, I suspect. First, the city is putting a .75% sales tax increase on the ballot this fall. Forty percent of the money it raises will go toward funding the Plan. Indeed, without this additional revenue all bets are off for the current version of the Plan; it simply can't work without the extra tax revenue.
The second reason for the capital markets creditors' flexibility was the thrashing they took in Judge Klein's opinion finding that Stockton was eligible for Chapter 9 relief. Calling out their lawyers as "testosterone-laden," even in a footnote, was harsh and made clear that success for the bond creditors would come only on appeal--after spending many more dollars of attorneys fees.
Third--and a hat tip to "Calpensions" blogger Ed Mendel here for this insight--Detroit. With Detroit's Chapter 9 filing the capital markets creditors suddenly had much bigger fish to fry. Getting slammed in Stockton would set an extremely bad precedent for Detroit while a decent Stockton settlement would free up resources for the really big showdown in Motown.
There are, of course, many problems that could yet derail confirmation of Stockton's Plan but I won't bore folks any more than I already have.
In any event, no matter what the reasons, my thesis in Fairness and Risk in Stockton: Pensions, Bonds, and Taxes -- When Doing Nothing is Doing Well (download here) was substantiated: the risk and extent of losses in a Chapter 9 are sufficiently great that parties will be driven to settlement.
I'm pleased that one of my predictions came to pass. Look here, where I scoffed at the city's assertion that it would file a plan by the end of July. Of course, in the same post I expressed my belief that Stockton would not be able to reach a global settlement with its cantankerous bond insurers without cutting payments to retirees. That prediction was (not entirely) wrong. Stockton is not cutting pension payments; yet it has eliminated retiree health benefits. The retirees claim they're suffering a hit of over half a billion dollars. Stockton's Plan proposes to pay them slightly under 1% of that amount.
But what about the bond insurers? Did they cave in or simply come down from their original "non-negotiable" starting point of payment in full? More toward the latter if I've read the settlement term sheets and 95-page Disclosure Statement correctly. (I need someone with an M.B.A. in finance to figure out just how much of a haircut the bond insurers are taking; any volunteers?)
The insurers will get payments of most of what they're owed with a "profit-sharing" possibility for one of them that might lead to payment in full. Even if they're not getting toasted, why the move toward the middle? Three reasons, I suspect. First, the city is putting a .75% sales tax increase on the ballot this fall. Forty percent of the money it raises will go toward funding the Plan. Indeed, without this additional revenue all bets are off for the current version of the Plan; it simply can't work without the extra tax revenue.
The second reason for the capital markets creditors' flexibility was the thrashing they took in Judge Klein's opinion finding that Stockton was eligible for Chapter 9 relief. Calling out their lawyers as "testosterone-laden," even in a footnote, was harsh and made clear that success for the bond creditors would come only on appeal--after spending many more dollars of attorneys fees.
Third--and a hat tip to "Calpensions" blogger Ed Mendel here for this insight--Detroit. With Detroit's Chapter 9 filing the capital markets creditors suddenly had much bigger fish to fry. Getting slammed in Stockton would set an extremely bad precedent for Detroit while a decent Stockton settlement would free up resources for the really big showdown in Motown.
There are, of course, many problems that could yet derail confirmation of Stockton's Plan but I won't bore folks any more than I already have.
In any event, no matter what the reasons, my thesis in Fairness and Risk in Stockton: Pensions, Bonds, and Taxes -- When Doing Nothing is Doing Well (download here) was substantiated: the risk and extent of losses in a Chapter 9 are sufficiently great that parties will be driven to settlement.
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