The Stockton Bankruptcy: Should Investors Be Worried?

By Ben Levisohn

The Los Angeles Times is reporting that the Stockton, Calif., City Council plans to vote tonight on whether or not to declare bankruptcy. If it votes yes, the city would become the largest in U.S. history to enter Chapter 9.

That’s bad news for Stockton’s bondholders, but the municipal-bond market is generally shrugging off the news. The iShares S&P Naitonal AMT-Free Muncipal Bond exchange-traded fund, the largest municipal bond ETF, has dropped just 0.1% as of 11:52 am today, while the Market Vectors High Yield Municipal Index ETF has dropped 0.2%. Both funds continue to trade at a premium to their net asset values, according to Morningstar.

Matt Fabian, managing director of research firm Municipal Market Advisors, doesn’t find that particularly surprising. Monday, he noted in a report to clients that he doesn’t “expect negative market action [to] follow the filing; the city’s situation has been well discussed in the industry and the media and it does not appear as precedent to additional filings by other CA cities in the near term.”

That “near term” is key. If Stockton is able to wrest meaningful concessions from bondholders—something that other Chapter 9 bankruptcy filers, including Vallejo, Calif., have not succeeded in doing—others might follow its lead. We likely won’t find that out for at least a year, Fabian says.

Keep reading at Total Return.