Bloomberg News

Stockton Schools Test Muni Market After City Bankruptcy

October 11, 2012

The public school district that serves Stockton, California, which became the biggest U.S. city to enter bankruptcy in June, plans to issue $45 million in debt as soon as next week in its first sale since the municipality sought Chapter 9 protection.

The separately financed Stockton Unified School District, which runs elementary and high schools as well as charter facilities, will issue general-obligation bonds maturing from 2013 to 2027 to refund higher-cost debt, according to data compiled by Bloomberg. It’s selling as the yield penalty on its previously issued debt has declined.

The deal will be the first by an issuer with “Stockton” in its name since June 28, when the city of 292,000 sought protection from creditors. An agricultural center about 80 miles (130 kilometers) east of San Francisco, Stockton aims to force investors to take a loss, according to analysts and court records.

Slideshow: Stockton, After the Bankruptcy

The name association “is one of the largest challenges we have as a district,” Wayne Martin, the school system’s chief business official, said in a telephone interview. “We just have to inform individuals that our finances are separate and apart from the city of Stockton and our school district is on pretty solid ground.”

Moody’s Investors Service rates the district’s general- obligation debt A2, its sixth-highest investment grade, citing the school system’s primary reliance on state funding, rather than the “pressured” local property tax base. In the year ended June 30, 2011, revenue exceeded operating expenses by $1.6 million, the most since 2007, according to data (57878MF:US) compiled by Bloomberg.

Investors have taken note, with the extra yield demanded by investors declining since the city’s bankruptcy.

Spread Narrows

A general-obligation bond issued by the district in 2006 and maturing in 2015 traded Oct. 5 at an average yield of 2.17 percent, or 1.78 percentage points more than top-grade debt with the same maturity, according to data compiled by Bloomberg.

On the day of the city’s filing, the same debt traded at an average yield of 3.21 percent, or 2.75 percentage points more than AAA three-year general-obligation securities.

This month’s issue will be used to refund higher-cost debt from 2001, 2003 and 2004, Martin said. The district will save more than $2 million on a present-value basis from the $45 million refinancing, he said.

The yield on 10-year general-obligation bonds with similar ratings to the school district fell to 2.71 percent on Oct. 5, the lowest since at least 1994, data compiled by Bloomberg show. In August investors demanded the least extra yield since 2008 to own debt from California, the lowest-rated U.S. state by Standard & Poor’s.

“Interest rates are at historically low levels, and we just wanted to make sure that if we’re able to save taxpayers’ dollars, that’s what we do,” Martin said. “Even though the school district is housed in the city of Stockton, they have their finances and we have ours.”

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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