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Hercules May Not Be Strong Enough to Stave Off Ch. 9

NEW YORK (The Deal) -- The City of Hercules, Calif., needs its electric system bondholders to tender their notes at a discount before April 4, or else the Bay Area suburb risks a default and possibly something worse--a municipal bankruptcy.

The city extended the deadline for bondholders to tender their notes when the count came in short on March 28, but Hercules' interim city manager, Phil Batchelor, warned by phone on Tuesday that a default on the electric system bonds could push the city into Chapter 9 bankruptcy.

The electric system bonds are so-called because they were issued in order to refinance the debt undertaken Hercules' electric grid, which started operation in 2003. Cities don't generally own their electric grids, and Hercules' is losing money.

Mobilizing the bondholders to tender their debt, however, has proved to be a Herculean feat.

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The city's bonds are "spread all over the place" rather than being concentrated in the hands of institutional investors, Batchelor said. He noted that the retail investors who hold the bonds may not understand the situation or have the same level of assistance that large institutional investors would bring to the table.

"We are fighting to not go into Chapter 9," Batchelor said.

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