UPDATE 2-S&P cuts Detroit GO bond ratings to D following default

Wed Oct 2, 2013 5:46pm EDT

Oct 2 (Reuters) - Standard & Poor's said it cut its rating on Detroit's general obligation debt to D from C on Wednesday because the city missed payment on its bonds, making S&P the second ratings agency to downgrade Detroit this week.

Fitch Ratings cut its rating on Monday, citing the city's imminent debt default.

"The downgrade reflects the nonpayment of debt service to the paying agent for the scheduled principal and interest payment date of Oct. 1," S&P credit analyst Jane Hudson Ridley said in a statement.

S&P said the downgrade affects about $411 million of unlimited-tax GO bonds and $197 million of limited-tax GO bonds.

Detroit on Tuesday skipped a payment on more than $600 million of general obligation debt that the city's emergency manager, Kevyn Orr, had determined to be unsecured.

In June, Orr announced a moratorium on paying debt service on unsecured debt, including certain GO bonds and $1.45 billion of pension debt that the city defaulted on that month.

With Detroit sinking under more than $18 billion of debt and other obligations, the city on July 18 filed what would be the biggest Chapter 9 municipal bankruptcy in U.S. history.

The city is continuing to make payments on its water and sewer revenue bonds, which Orr had deemed secured, Moody's Investors Service said on Wednesday.

However, the rating agency warned that the revenue debt still faces risks, including Orr's assertion that the debt was subject to negotiation with bondholders and his plan for creating a new authority to operate water and sewer systems and restructuring the outstanding bonds.

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MF Global trustee plans to return more customer funds

Wed Oct 2, 2013 10:55pm EDT

* Brokerage unit trustee seeks to repay U.S. customers

* Seeks to distribute funds even to those who traded on foreign exchanges

* MF Global went bankrupt in October 2011

Oct 2 (Reuters) - The trustee liquidating the brokerage unit of MF Global Holdings Ltd has asked a federal bankruptcy judge for permission to return remaining funds to U.S. customers who traded on domestic exchanges.

Wednesday's request by court-appointed trustee James Giddens would reallocate money earmarked for general unsecured creditors to customers of the brokerage, who have a higher-priority payback status. The move could bring closure to customers who have waited nearly two years to fully recover their money, which became tied up when MF Global went bankrupt on Oct. 31, 2011.

Giddens has estimated that $1.6 billion went missing from customer accounts, mainly in the few days prior to MF Global's collapse, and that so far about 98 percent of the money has been returned to customers who traded on U.S. exchanges, and 74 percent to customers who traded on foreign exchanges.

"The relief sought in this motion, if granted, should allow every one of the more than 26,000 former customers of MFGI with allowed net equity claims to be paid in full before the end of the calendar year," attorneys for trustee Giddens said in a court filing.

MF Global was a commodities brokerage run by Jon Corzine, the former New Jersey governor and senator and a former Goldman Sachs chairman.

After its collapse amid exposure to risky European sovereign debt, regulators found that MF Global had tried to bridge its liquidity gaps in its hectic final days by improperly dipping into customer funds.

Giddens was tasked with recovering as much of that money as possible, including through settlements with MF Global counter-parties, including JPMorgan Chase & Co and CME Group Inc.

Last year, Giddens said there was still likely to be a hole in customer funds, and that he would seek to bridge it by reallocating money earmarked for non-customer unsecured creditors.

At the time, Louis Freeh, a separate trustee in charge of MF Global's parent entity, challenged whether Giddens had the authority to do that. The sides ultimately settled their differences, and Wednesday's motion seeks to establish that allocation.

A final, complete distribution can only be initiated after court approval. Anyone who opposes the allocation will have until Oct. 16 to file an objection.

Approval of this motion would allow Giddens to move forward with a 100 percent final distribution to all former customers of the brokerage, including those who traded on foreign exchanges.

Corzine faces lawsuits from Freeh, Giddens and customers accusing him of negligently pursuing risky trading strategies, which included a $6.3 billion bet on European sovereign debt, that strained the company's liquidity and culminated in its demise. Corzine has denied wrongdoing.

The cases are In re: MF Global Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-2790; and In re: MF Global Holdings Ltd in the same court, No. 11-15059.

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BPE sets guidance on Europe's first Additional Tier 1

By Helene Durand

Thu Oct 3, 2013 4:01am EDT

LONDON, Oct 3 (IFR) - Banco Popular Espanol, rated Ba3/BB-/BB+ at the senior level, has set initial price thoughts on its contingent convertible Additional Tier 1 deal, the first in euros, at 11.75% area.

The Spanish lender announced on Tuesday that it had mandated Bank of America Merrill Lynch, Barclays, Santander and UBS for a EUR500m perpetual non-call five-year CoCo, the success of which will be key to determining whether the eurozone's weaker banks can meet stringent capital regulations in a cost-efficient manner.

At 11.75% area, the guidance is in line with early market whispers.

According to the leads, investor interest is approaching EUR1bn on the transaction, which is expected to be priced later on Thursday. (Reporting by Helene Durand; editing by Alex Chambers)

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Detroit defaults on more than $600 mln of 'unsecured' GO bonds

Tue Oct 1, 2013 6:13pm EDT

Oct 1 (Reuters) - Detroit on Tuesday defaulted on more than $600 million of general obligation bonds deemed unsecured by the city's emergency manager, a city spokesman said.

The move marked the second bond default by cash-strapped Detroit after Kevyn Orr, the former corporate bankruptcy attorney who has been running the city since March, announced on June 14 a moratorium on unsecured debt payments.

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Bankrupt California city wants deal with bond insurer by Thursday

STOCKTON, Calif. | Tue Oct 1, 2013 7:49pm EDT

STOCKTON, Calif. Oct 1 (Reuters) - Stockton, California, hopes to have a deal with bond insurer Assured Guaranty by Thursday, but if needed the city could impose a settlement to help it exit bankruptcy, its city manager said.

"We want consent," Stockton Manager Bob Deis said during a press briefing on Tuesday. "But it's not necessary."

Stockton released on Friday a draft plan for adjusting its debt to exit from municipal bankruptcy that maintains pension obligations to city employees while paying some creditors less than they are owed.

Stockton's city council could approve the draft as soon as Thursday, opening the door for the city to file it as its exit plan with the judge hearing its bankruptcy case.

Creditors have to vote on the plan.

The draft plan said Stockton had the "outlines of a negotiated settlement" with Assured over $124.3 million in outstanding pension obligation bonds that the city had targeted for losses to restructure its finances.

No details were provided in the draft and Deis declined to elaborate on the talks with Assured. A spokeswoman said the bond insurer had no comment.

Assured and fellow bond insurer National Public Finance Guarantee led efforts by Stockton's so-called capital markets creditors to block the city's bankruptcy case, saying city pensions managed by the California Public Employees' Retirement System should have been treated like other debt.

The draft plan also disclosed a preliminary deal with National over $45.1 million in outstanding lease revenue bonds for the city's arena whose payments will be cut by 3 percent. Other bonds related to parking garages will be cut by 12 percent, while a third bond for a city building will be paid in full.

A spokesman for National declined to comment on the agreements.

Deis does not anticipate further opposition by the bond insurers over Stockton's pensions.

"I expect that message to not be front and center," he told Reuters.

With about 300,000 residents, Stockton set itself apart from Detroit, which has filed the U.S. largest municipal bankruptcy, and from smaller San Bernardino, because it intends to leave pension payments whole.

Stockton defended its pensions, and the $268 billion state pension fund was prepared to back that in bankruptcy court, with cuts to payrolls, as well as to benefits.

Stockton's retired employees are also contributing by giving up their city-provided medical care, Deis noted.

Stockton's plan for exiting bankruptcy assumes voters will approve a sales tax increase in November to help bolster its finances and standing in bankruptcy court. If they do not, the city would need to cut $11 million in spending, which would fall on libraries, community centers and fire houses, Deis added.

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Fidelity hires advisers for Energy Future reshuffle plan -sources

By Nick Brown and Michael Erman

NEW YORK | Wed Oct 2, 2013 12:48am EDT

NEW YORK Oct 2 (Reuters) - Fidelity Investments, a creditor of Energy Future Holdings Corp, has hired advisers to propose a restructuring plan for the Texas utility in the hope of saving it from a protracted bankruptcy, according to three people close to the matter.

Fidelity, which has amassed EFH bonds, is working on a proposal it aims to present this month, the people told Reuters, declining to be named because the information is not public.

EFH, saddled with $40 billion of debt, wants to finalize a restructuring plan before $250 million worth of bond payments are due on Nov. 1. Filing for bankruptcy before Nov. 1 would suspend the bond payments; but filing without a restructuring plan could entail years of battles and competing restructuring plans in bankruptcy court.

Dispute among stakeholders over how to divide EFH equity makes that deadline unlikely to be met, prompting Fidelity to take steps toward crafting its own plan.

Fidelity does not intend any proposal to necessarily compete with those already on the table. With sizable holdings on both the regulated and unregulated sides of EFH's capital structure, Fidelity may want to propose a plan that strikes a compromise, two of the people said.

Fidelity has hired financial advisers from Perella Weinberg Partners and restructuring lawyers from Fried Frank Harris Shriver & Jacobson, the three people said.

A spokeswoman for Parella Weinberg declined to comment. A spokeswoman for Fried Frank did not immediately respond to requests for comment on Tuesday evening.

EFH's capital structure includes more than $32 billion of debt split up into various categories at the holding company of its unregulated retail and merchant power units, and another $7.7 billion in senior and junior debt at Energy Future Intermediate Holding Company LLC (EFIH), the parent of its regulated power distribution business, Oncor Electric Delivery Company.

Fidelity's holdings consist of various EFIH secured bonds, according to company disclosures and analysts, some of which include terms that make it costly for EFH to refinance them. Fidelity has not disclosed the exact amount of its EFH holdings.

EFH declined to comment on Tuesday.

NON-DISCLOSURE AGREEMENTS EXTENDED

EFH, formerly TXU Corp, was taken private in 2007 in a $45 billion buyout, the largest-ever leveraged buyout. The deal saddled the company with debt just before a major decline in natural gas prices and energy markets.

The buyout consortium included private equity firms KKR & Co LP, TPG Capital Management LP and Goldman Sachs Group Inc's private equity arm.

EFH's larger creditors have signed extensions of non-disclosure agreements that will allow them to continue discussing possible restructuring scenarios, said two of the people close to the matter. Initial NDAs would have expired on Sept. 27, the people said, without elaborating on the new expiration date.

So far, talks have been unsuccessful, and have included many constituents. Equity sponsors hope for a deal with EFH's secured lenders that allows them to retain an equity stake, but the lenders have insisted that any deal must also address the debt held by unsecured bondholders of EFIH, several people close to the matter told Reuters last month.

The lenders have offered those bondholders 9 percent of the restructured company, which the bondholders rejected last month. According to two people close to the matter, one option the sides have discussed to sweeten the pot for the bondholders was the inclusion of a so-called contingency value right, which would increase bondholders' payout if EFH meets certain performance goals.

Several sources close to the discussions have told Reuters a deal to avoid bankruptcy is unlikely. Even a pre-negotiated bankruptcy - in which sides agree to a basic framework before filing for Chapter 11 - would be difficult to achieve by the Nov. 1 bond payment date, the people said.

EFH could elect to make its Nov. 1 payment and extend talks, but the company would like to resolve its debt issues sooner rather than later, said the people close to the matter.

EFH on Monday paid roughly $60 million to second-lien bondholders on its unregulated side, the people said. Companies close to bankruptcy often miss bond payments. This payment - a drop in the bucket for the enormous EFH - was expected, the people said.

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Detroit's expected bond default seen raising constitutional issue

Sept 30 | Mon Sep 30, 2013 7:07pm EDT

Sept 30 (Reuters) - Detroit is poised to default on about $641 million of its general obligation bonds on Tuesday, an event that is likely to spur a legal challenge over Detroit's decision to take tax money earmarked for bond payments and apply it instead to city needs.

About $411 million of the bonds targeted for default were subject to voter approval and raise money through property taxes, called millages.

A default on bonds that had been considered secured obligations could give rise to a claim that it is a violation of Michigan's constitution, which prohibits diverting revenue from tax millages to alternative purposes.

If the city does default, bondholders can still expect to receive payments, but the funds will come from bond insurance policies purchased by Detroit as its financial picture weakened in recent years.

Kevyn Orr, the state-appointed emergency manager who has been running the city since March, first warned bondholders on June 14 that he was labeling nearly $641 million of unlimited tax and limited tax general obligation debt outstanding as unsecured.

His plan to pay pennies on the dollar to unsecured creditors, including general obligation bondholders, through the future sale of notes is the template for Detroit's reorganization plan should the city be deemed eligible to remain in federal bankruptcy court, according to Orr's spokesman, Bill Nowling.

With Detroit sinking under more than $18 billion of debt and other obligations, Orr on July 18 filed what would be the biggest municipal bankruptcy in U.S. history.

"It seen pretty clear, you need to stop collecting the millage," said Eric Lupher, director of local affairs at the Citizens Research Council of Michigan, a non-partisan public affairs research group.

The constitution prevents revenue from tax millages from being diverted to cover a city's operational expenses. The millage "is only used to pay principal and interest. You just can't ignore that now because you need the money," Lupher said.

Anthony Minghine, associate executive director of the Michigan Municipal League, said that if any Michigan city were to tap debt service millage for operating purposes outside of bankruptcy proceeding the move would definitely be called into question.

"A (property tax) millage was levied for a specific purpose and if you don't use it for that purpose -- I want my money back," he said, referring to property taxpayers who may not agree with diverting the money. He added that it was unclear how voter-approved general obligation bonds will fare in Detroit's bankruptcy case.

Orr has said all unsecured debt is subject to immediate moratoria on payments, and the bonds that come due Tuesday are the second to fall under the moratorium after the city defaulted on $1.45 billion of pension debt in June.

The purpose of the moratorium was "to conserve cash so that (Detroit) can continue to provide essential services to its citizens," Orr said in his June 14 statement. His office pegged principal and interest payments on the city's general obligation bonds at $129 million in fiscal 2014, which began July 1.

Nowling and Michigan officials have declined to comment on the plan for the tax revenue earmarked for paying off Detroit's voter-approved general obligation bonds.

Of $1 billion of outstanding debt carrying Detroit's general obligation pledge, Orr has said he believes only $349 million of limited and unlimited tax general obligation bonds and nearly $90 million of notes and loans should be considered secured liabilities of the city.

Orr's office may shed some light on the situation later this week. Nowling said "the city will discuss its rationale for making any payment decision after it has made it."

Detroit bondholders can receive full payment on general obligation debt thanks to insurance policies purchased by the city.

Assured Guaranty, a major insurer of Detroit's bonds, said in a statement that it will meet its obligations under the policy sold to the city. "As always, investors that hold bonds insured by Assured Guaranty can be certain that they will continue to receive uninterrupted full and timely payment of scheduled principal and interest when due," it said in a statement.

Assured insures about $187 million of Detroit's unlimited tax general obligation bonds and $17.7 million of the city's limited tax bonds as of the end of fiscal 2012, according to a debt summary from Orr's office.

Other bond insurers -- National Public Finance Guarantee Corp, the public finance subsidiary of MBIA Inc.; Ambac Assurance Corp; and Syncora Guarantee -- also said they would make payments on Detroit debt they insure.

Ahead of the default, Fitch Ratings on Monday dropped Detroit's current credit rating to the lowest level of D, from C, affecting $613.8 million of limited and unlimited tax general obligation bonds.

In a report earlier this month, Fitch noted there is little precedent for classifying unlimited tax general obligation bonds as unsecured debt. Should a bankruptcy court approve Detroit's treatment of these bonds as unsecured debt, Fitch will reassess its ratings of tax-supported debt ratings within Michigan and perhaps the rest of the country, the firm said in a statement.

Frank Shafroth, director of the State and Local Government Leadership Center at George Mason University, said Detroit's treatment of unlimited tax general obligation bonds has a "fair chance" of getting appealed all the way to the U.S. Supreme Court if the bankruptcy court goes along with the move.

Detroit's historic bankruptcy filing and the uncertainty it is causing in the $3.7 trillion municipal bond market has grabbed the attention of regulators and others.

John Cross, head of the Securities and Exchange Commission's Office of Municipal Securities, said the office is closely following developments in Detroit's case with an eye toward implications it could have for general obligation bonds and public pensions beyond Detroit.

Allen Robertson, the newly elected president of the National Association of Bond Lawyers, said his group will be looking at general obligation bonds in the context of disclosure and bankruptcy cases like Detroit's. If the bankruptcy court agrees with Orr's handling of general obligation bonds, he said, investors and others would probably reconsider their assumptions about full faith and credit pledges on debt.

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Brazil's OGX on track to miss $44.5 mln interest payment -sources

By Guillermo Parra-Bernal and Sabrina Lorenzi

SAO PAULO/RIO DE JANEIRO, Sept 30 | Mon Sep 30, 2013 7:25pm EDT

SAO PAULO/RIO DE JANEIRO, Sept 30 (Reuters) - Brazilian oil producer OGX Petróleo e Gas Participações SA is on track to forego a $44.5 million interest payment due on Tuesday, two sources with knowledge of the plans said, moving the company closer to the largest Latin American corporate debt default ever.

Should the company decide to miss the coupon payment, an announcement will be made within a few days, said one of the sources. The other said OGX wants to use a 30-day grace period that starts when the company misses the payment to conclude debt restructuring talks with bondholders.

The most likely path for OGX, controlled by former billionaire Eike Batista, is to file for bankruptcy protection in late October following the decision to forego the payment, the second source added.

The sources spoke on condition of anonymity because they were not authorized to speak publicly about the situation.

A spokeswoman for OGX declined to comment.

OGX hired Blackstone Group LP and investment banking firm Lazard Ltd to help the ailing oil producer "review its capital structure." A group of bondholders, preparing for a contentious negotiation with the cash-strapped oil company, hired financial advisory firm Rothschild to advise them on a potential debt restructuring.

Pacific Investment Management Co, the world's largest bond fund known as Pimco, and BlackRock Inc, the world's largest money manager, are part of the group. Combined, bondholders on that group own more than half of OGX's $3.6 billion in outstanding bonds.

Tuesday's payment is on $1.1 billion of bonds due in 2022 . OGX faces an approximately $100 million coupon payment on its debt due in 2018 this December.

Bondholders were irked after Brazil's biggest banks refinanced maturing debt and stretched out debt repayments for Batista's cash-strapped mining, logistics and energy conglomerate, Grupo EBX. Banks have also been repaid some of the debt with proceeds from asset sales.

The pressure exerted by state and private-sector banks on EBX could enable them to virtually eliminate any significant loss on their exposure to the struggling group. But bondholders are set to face hefty losses on their investments with Batista, who less than two years ago had the world's seventh-largest fortune worth about $35 billion.

Prices on the bonds have tumbled more than 80 percent this year, making them the worst performing emerging-market bonds, according to Thomson Reuters data. Shares of OGX slumped 25 percent on Monday.

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UPDATE 2-Mobilicity wins creditor protection, seeks buyout OK

Mon Sep 30, 2013 7:26pm EDT

By Alastair Sharp

TORONTO, Sept 30 (Reuters) - Wireless telecom company Mobilicity, one of the smallest players in the Canadian market, said it won creditor protection from an Ontario court on Monday as it seeks regulatory approval for a transaction that would allow it to keep operating.

Mobilicity said the tentative transaction is currently being reviewed by the federal government, but declined to identify the possible buyer. It said in July it was talking to several interested parties.

A source told Reuters in June that Verizon Communications Inc was in talks with Mobilicity, although Verizon has since said it is not interested in the Canadian telecoms market.

Major operator Telus Corp had a bid for the company blocked earlier that month by the federal government, which is eager to see four wireless competitors in each region, but one analyst suggested after the announcement that Telus could make a fresh offer. Telus declined to comment.

Mobilicity said its customers would not notice any change in wireless service while it is in protection and that its dealer network remains open for business.

"This step was taken today to give us the time to create stability in the company, to stop the clock as it were, and allow the company to restructure its affairs as this review takes place," Stewart Lyons, Mobilicity's chief operating officer, told Reuters in a phone interview.

Mobilicity was one of several new entrants to Canada's wireless industry that bought spectrum in a 2008 auction. They have since helped to lower average wireless bills but struggled to dent the dominance of three major carriers: BCE Inc's Bell, Rogers Communications Inc and Telus.

Mobilicity did not apply to take part in another auction of valuable airwaves due to start in January. Its biggest debtholder, private equity firm Catalyst Capital Group Inc, and its founder and executive chairman, John Bitove, have applied separately.

The Ontario Superior Court of Justice, which granted the protection under the Companies' Creditors Arrangement Act, also approved debtor-in-possession financing from some of Mobilicity's noteholders to a maximum amount of C$30 million ($29.2 million).

Lyons and chief restructuring officer Bill Aziz said Catalyst was not among the debtors providing the additional funding, which should keep Mobilicity operating to spring of 2014.

The order provides an initial stay on all claims against Mobilicity - legally known as Data & Audio-Visual Enterprises Holdings Inc - for 30 days and requires suppliers to continue dealing with the company, Aziz said.

BLOCKED BID

Earlier this year, the federal government effectively blocked a C$380 million deal for Telus to buy Mobilicity by saying Telus could not take over Mobilicity's wireless spectrum licenses.

Telus has since taken the government to court to challenge its restrictions on the sale of spectrum licenses, arguing that when Mobilicity bought the airwaves it was on the understanding it could sell them to the established operators after five years.

Canaccord Genuity analyst Dvai Ghose said he believes Telus is the prospective buyer again, and that a second rejection could open Ottawa up to legal action from Mobilicity debtors.

He said it was unlikely that private equity would be willing to finance the purchase of spectrum, expansion of networks and technology upgrades necessary for Mobilicity or other small entrants to better compete with established players.

One of the other new entrants from the 2008 auction, Wind Mobile, has also been the subject of takeover speculation but will be bidding in the next auction. Another of the upstarts, Public Mobile, was recently acquired by private equity firms but will not seek more airwaves in the auction due to start in January.

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UPDATE 2-Bankrupt Stockton, California says has deals with key creditors

Fri Sep 27, 2013 11:42pm EDT

By Jim Christie

SAN FRANCISCO, Sept 27 (Reuters) - Stockton, California said on Friday it had struck tentative deals opening the door to settlements with two major creditors, and putting the city at the "beginning of the end" of its bankruptcy case.

The deals also could avert a major court fight promised by the creditors, bond insurers that led opposition to Stockton's bankruptcy and who had threatened to drag the state pension fund Calpers into their fight with the city.

In a draft of its plan for exiting bankruptcy, Stockton said it had the "outlines of a negotiated settlement" with bond insurer Assured Guaranty over $124.3 million in outstanding pension obligation bonds the city had targeted for losses.

The draft plan also disclosed a preliminary deal with bond insurer National Public Finance Guarantee over $45.1 million in outstanding lease revenue bonds for the city's arena that had been in dispute.

The draft plan provided no details on the potential settlement with Assured and a spokesman for the bond insurer declined to comment. The draft said Assured executive management had not yet reviewed the deal.

"As this document was being finalized, the City was in negotiations with this creditor and had developed the outlines of a negotiated settlement," the draft said.

It also said a preliminary term sheet agreement had been reached with National, along with agreements on other bonds insured by it relating to parking garages and a city building.

National spokesman Kevin Brown confirmed the deal to Reuters: "We're pleased to have reached a settlement agreement with the City of Stockton that should expedite its exit from bankruptcy."

The draft said Stockton is near the "final chapter" of bankruptcy, noting that "while we expect further intense negotiations and court hearings, with perhaps a set back here and there before this is over, this at least is the beginning of the end."

National and Assured led efforts by Stockton's so-called capital markets creditors to block the city's bankruptcy case from moving forward, and they had insisted city pensions managed by Calpers be treated like other debt the city wanted to impair.

The U.S. municipal bond market has been watching Stockton's bankruptcy case closely for more than a year as the city in California's Central Valley had been aiming to force bondholders to swallow losses while leaving pensions untouched.

Alabama's Jefferson County in its bankruptcy restructuring plan in June proposed losses for bondholders, becoming the first local government to do so since the 1930s.

Pension costs are a growing concern for the $3.7 trillion municipal debt market and National and Assured contested Stockton's maintaining payments to Calpers, the California Public Employees' Retirement System.

U.S. Bankruptcy Judge Christopher Klein in April found Stockton eligible for bankruptcy protection and said the showdown the insurers sought over payments to Calpers would have to wait until the city filed its plan for adjusting its debt to exit from bankruptcy.

Calpers, had been sidelined in Stockton's bankruptcy proceedings but was ready to help defend its pension payments.

A spokeswoman for the $269 billion pension fund released a statement hinting at a truce with Stockton's capital market creditors. "We are hopeful this proposed plan of adjustment will allow Stockton to regain its footing and continue to provide the essential services to its citizens," the statement said.

Stockton's draft plan said the city would keep paying into Calpers, noting it would "reform and reduce the costs of its pension program along with other post-employment benefits, but retain the basic Calpers pension which is crucial to the City's ability to recruit and retain a quality workforce."

Dale Ginter, a lawyer for Vallejo, California's, retired employees in that city's bankruptcy, said he sensed exhaustion on the part of Stockton's bond insurers: "People are probably tired. They've spent a lot of money on attorneys fees".

Ginter also believes the bond insurers saw they may be better off cutting deals than continuing to contest pension payments in court when city employees and retirees had given up so much in concessions to help the city fix its finances.

"The employees and the retirees are taking a very big reduction in benefits," said Ginter after reading through Stockton's draft plan.

It projected Stockton's general fund through fiscal 2049-2050 would save $659 million from pension reforms while ending medical benefits for retirees would save $812 million over the same period.

The timing for a clash with Stockton over its plan for adjusting its debt to exit bankruptcy also would have been problematic for the bond insurers.

Stockton's city council recently put a measure to increase the city's sales tax on the November ballot to in part help the city exit bankruptcy following its austerity measures.

With revenue tumbling as its housing market crashed, Stockton cut $90 million in spending from 2008 through last year to balance its budgets and slashed it work force. But early last year Stockton's city council rejected deeper cuts due to concerns about public safety amid a spike in violent crime and it approved declaring bankruptcy.

Stockton's city council will take up the draft on Oct. 3 and the city could file a final plan with Klein early next month. With about 300,000 residents, Stockton was the most populous U.S. city to file for bankruptcy until Detroit filed in July.

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