Moody's Drops $5B of Merrill-Guaranteed Prepay Gas Contract Debt to A2

ATLANTA -Moody's Investors Service yesterday lowered to A2 from A1 almost $5 billion of debt associated with various prepay natural gas contracts after Merrill Lynch & Co., the guarantor of the deals, also was downgraded to A2.

The issuers of the debt include the Main Street Natural Gas Inc., the Public Authority for Colorado Energy, the Roseville Natural Gas Financing Authority, and the Texas Municipal Gas Acquisition & Supply Corp.

Merrill Lynch has suffered in the fallout of the subprime mortgage crisis. Moody's last week put the issuers on watch for possible downgrades.

Fitch Ratings also put about $2 billion of such debt on watch for a possible downgrade earlier this month. The issuers include Main Street Natural Gas, the Long Beach Finance Authority, and Roseville Natural Gas. All of the deals carry Fitch's A-plus rating, which is the same as that assigned to Merrill Lynch.

Standard & Poor's changed its outlook on the deals to negative from stable in June.

Rating agency analysts point out that gas prepay bonds are repaid with the proceeds from the sale of the gas, or guaranteed payments. In addition to the issuer and underwriter, gas deals involve a supplier and a guarantor that ensures the issuer is paid if gas is not supplied.

Because the gas supplier and guarantor are subsidiaries of the underwriter, the health of the underwriter strongly dictates the ratings.

The following debt issues were affected by the Moody's downgrade:

* Main Street Natural Gas Inc. gas project revenue bonds, Series 2006B, $537 million

* Main Street Natural Gas Inc. gas project revenue bonds, Series 2007A, $500 million

* Long Beach Bond Finance Authority, Calif., natural gas purchase revenue bonds, Series 2007A, $886 million

* Public Authority for Colorado Energy natural gas purchase revenue bonds, Series 2008, $630 million

* Roseville Natural Gas Financing Authority, Calif., gas prepayment revenue bonds, Series 2007A, $195 million

* Texas Municipal Gas Acquisition & Supply Corp. I gas supply revenue bonds, Series 2006A, 2006B, and 2008D, $2.3 billion.

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