Financial Industry Challenges Could Affect Gas Bonds

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<h3>Jay Abrams</h3>

Jay Abrams

S&P and Fitch have placed Main Street’s 2008A bonds on Negative Watch. The rating actions follow the placement of Lehman Brothers Holdings on Negative CreditWatch due to uncertainty regarding the firm’s ability to raise additional capital. Both the Main Street bonds and Lehman Brothers are rated “A” by S&P and “A+” by Fitch. Moody’s has placed its “A2” rating on Lehman on review with direction uncertain.

Previously, similar actions were taken on other prepaid gas transactions as a result of Wall Street firms’ financial problems. Fitch placed $2 billion of such bonds on Negative Watch in July due to their direct counterparty relationships with Merrill Lynch. Continuing pressures on the nation’s largest financial firms have translated into credit rating concerns on the financial obligations of their various operating units. Meanwhile, demand by natural gas purchasers for gas acquired through prepaid transactions has been strong.

Main Street is a special purpose vehicle created by the Municipal Gas Authority of Georgia as a non-profit conduit to issue bonds. Bond proceeds were used to prepay the purchase of 160 billion cubic feet of natural gas scheduled for delivery to Main Street over 30 years by Lehman Brothers Commodity Services (LBCS). In its CreditWatch statement, S&P gave as its reason for the rating action that, “The rating on Main Street’s 2008A transaction is currently tied to the rating of Lehman, which guarantees the performance of the gas supplier and is the lowest rated counterparty in the transaction.”

Once the gas is received, Main Street sells it to the city of Tallahassee, Florida, or the Gas Authority itself for distribution to local municipalities or their utilities.

There are several counterparties to the transaction and the performance of all are vital to the success of the transaction. The role of LBCS is most important since if any counterparty fails to perform its duties, an early termination of the prepay gas contract would occur and would trigger a call of the bonds. As S&P further noted, “If an early termination occurs, LBCS will owe a termination payment that along with funds scheduled to be on hand, is structured to be sufficient to redeem the outstanding bonds.”

S&P concluded that, “resolution of the CreditWatch listing on Main Street’s 2008A bond issue will depend on the resolution of the CreditWatch listing on Lehman.”  S&P expects to conclude its review of Lehman Brothers within 90 days.

Jay Abrams is the Chief Municipal Credit Analyst of FMSbonds, Inc.
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Sep 11, 2008

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