By NATHALIE TADENA

Moody's Investors Service lowered its junk-level rating of Stockton, Calif. after the city voted to suspend payments on some of its lease and pension obligation bonds in fiscal 2013 to close an approximately $26 million budget gap.
Moody's lowered Stockton's pension obligation debt three notches to Caa3 and lowered its lease-revenue debt two notches, also to Caa3. The outlook is negative, reflecting the high likelihood that losses to bondholders could exceed the firm's expectations. The firm withdrew Stockton's issuer rating for business reasons.
Moody's said the downgrades reflect the city's announcement that it will likely file for bankruptcy protection after a three-month mediation process with its creditors failed. The firm also said that the magnitude of the budget gap and heavy reliance on debt service reductions as part of budget solutions indicates a high level of losses that the city's bonds would experience in bankruptcy.
Earlier Wednesday, Standard & Poor's lowered its issuer credit rating on Stockton to default from selective default.
Stockton late Tuesday voted to adopt a new budget under which it can operate if it is under bankruptcy, a move widely considered the last step before the city formally files for Chapter 9 protection.
At a Stockton City Council meeting Tuesday, council members voted 6 to 1 in favor of the budget, which allows the city to pay for day-to-day operation while it is in bankruptcy protection. While the Council didn't formally declare that Stockton is bankrupt, officials said filing for Chapter 9 protection was the city's only option.
Stockton, with 300,000 residents and $700 million in debt, would be one of the largest cities ever to file for Chapter 9 protection, according to municipal finance experts and bankruptcy officials.
Write to Nathalie Tadena at [email protected]