DALLAS - Lehman Brothers' bankruptcy, the pending acquisition of Merrill Lynch & Co., and financial turmoil at AIG created a swirl of uncertainty around $4 billion of prepaid gas bonds amid a series of rating actions.
Most severely affected were bonds used to finance a $709 million prepaid gas contract under the authority of Main Street Natural Gas Inc. The bankruptcy of the commodity provider in the deal - Lehman Brothers - leaves the bonds on the verge of default.
Standard & Poor's lowered the rating on the bonds from A to CCC-minus, while Fitch Ratings dropped its A-plus to CCC. Moody's Investors Service downgraded the bonds from A2 to B3, leaving the rating on watch for further downgrade.
Susan Reeves, chief financial officer at Municipal Gas Authority of Georgia, creator of Main Street as a natural gas broker for several public utilities, said the utilities are still receiving gas, despite Lehman's bankruptcy.
"It's still performing, but we believe it's day-to-day until we hear from them," she said.
Under a best-case scenario, a deal would be worked out for Barclays Bank to acquire the contract, along with other Lehman assets, Reeves said.
A worst-case would be termination of the contract, which would leave the bondholders as creditors in the bankruptcy and the gas utilities without the prepaid discount on the commodity over the 30-year life of the bonds.
"What we lose is the benefit of our bargain," Reeves said. "For the bondholders, that's a very bad outcome."
Main Street was also affected by Merrill's proposed acquisition by Bank of America. Merrill, the commodity provider for about $1.2 billion of Main Street's pre-paid gas deals, saw its ratings go on the watch lists of all three ratings agencies.
The watch also affects a recent deal for $653 million from the Public Authority for Colorado Energy Gas Purchase in Colorado Springs, and a $209 million pre-paid deal for the Roseville, Calif., Natural Gas Financing Authority issued in 2007.
Merrill's rating on the deals remained at A from Standard & Poor's and Moody's and A-plus from Fitch.
Fitch changed the outlook on its A rating for a $240 million Merrill deal involving the Clarksville Natural Gas Acquisition Corp. to evolving from negative. But Standard & Poor's said its BBB-minus rating on that deal was not affected. Standard & Poor's based its rating on the deal's insurer, Syncora Guarantee Inc., formerly XL Capital Assurance Inc.
Moody's, meanwhile, downgraded the rating of the Southern California Public Power Authority gas project revenue bonds, Series 2007, from A1 to A2, leaving it on watch for further downgrade. The rating action on the Goldman, Sachs & Co. contract follows Moody's recent downgrade of the rating of AIG, the commodity swap guarantor, to A2 from Aa3.
"The rating also reflects Moody's assessment of participant nonpayment under the gas supply contracts," Moody's analysts wrote. MBIA Insurance Corp. "provides customer insurance policies that cover the municipal participants' failure to pay."
Main Street's Reeves said the problems for the investment banks will stall any new gas deals for the foreseeable future.
"I think that it's going to be at a standstill until we get past these financial issues and investor confidence returns," she said.
