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BP-Linked Bond Yields Spike

CHICAGO — Yields on floating-rate municipal prepaid gas bonds with ties to BP have spiked to nearly 9% from less than 0.5% as credit analysts continue to cut their ratings on the oil giant.

Moody’s Investors Service and Standard & Poor’s have downgraded all their ratings to Baa1 and A, respectively, on prepaid gas bonds where BP Corporation North America Inc. is acting as gas supplier and liquidity provider on the transactions.

The downgrades affect nearly $2 billion in debt issued by three municipal gas suppliers. Another $1.9 billion issued by a fourth supplier — where BP serves as the commodity swap counterparty — is on watch for possible downgrade.

All the debt is on negative outlook pending future lowered ratings on BP, which has suffered a round of downgrades tied to uncertainty and fiscal pressure from the massive Gulf of Mexico oil spill.

Prepaid gas bond deals, under which a municipal utility issues tax-exempt bonds to pay a gas supplier for gas over a 20- or 30-year period, typically involve several counterparties and heavy “credit linkage,” according to Standard & Poor’s analysts.

The three issuers of the downgraded prepaid gas bonds, for example, have BP as a gas supplier and standby bond purchase agreement provider as well as separate interest-rate and commodity-price swap agreements with Societe Generale.

Moody’s and Standard & Poor’s cut their ratings to Baa1 and A on $500 million of BP-related prepaid gas bonds issued by Nebraska’s American Public Energy Agency.

Yields on a $288 million piece of the debt issued in 2005 spiked to 9.5% in mid-June from an average of 0.21% in mid-May, according to trade data from the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access ­system.

APEA’s interest-rate swap with Societe Generale is protecting the agency from major fiscal fallout, said Roger Mock, APEA’s president and chief executive ­officer.

“Being a quasi-municipal agency, we cannot assume the risks of interest-rate volatility and commodity-price volatility, and that’s why we enter into swaps to mitigate that risk,” Mock said. “So if the bond rate is 9% or half a percent, we account for that risk.” 

“These are untested and untried times,” Mock added. “Everyone that has [ties to BP] has been living with these things everyday. I’m paying very close attention to whether BP is going to go bankrupt or continue to operate or pay the whole $20 billion and everybody will be happy. I need my gas delivered and that’s what I’m counting on happening unless I get notice.”

In APEA’s case, bond documents allow the trustee to replace any swap counterparty that is not rated at least AA-minus, Standard & Poor’s noted in its recent downgrade report. The documents also stipulate that in the event of BP’s insolvency or payment default, it must make an early termination payment that will allow the trustee to redeem bonds at par value, plus any accrued interest. Analysts consider both provisions credit strengths.

Moody’s and Standard & Poor’s also downgraded — to Baa1 and A, respectively — roughly $1 billion of prepaid variable-rate gas bonds issued by Public Energy Authority of Kentucky Inc. A chunk of those floating-rate bonds with short-term resets saw interest rates rise to 7% in mid-June from 0.3% in mid-May, according to the EMMA site.

The Mississippi Development Bank had roughly $425 million of bonds issued in 2005 cut to Baa1 by Moody’s and A by Standard & Poor’s. Yields on $300 million of floating-rate 2005 debt rose to 9.5% on June 16 compared to 0.5% on May 20.

Yields on BP-backed bonds, where municipal issuers have issued debt to back BP projects and it pays the debt, have also climbed in the months since the disaster. A $200 million piece of debt issued by Whiting, Ind., in 2008 was trading at a yield of 6.8% yesterday compared to 2.1% on May 25, 2010, trade data showed.

Shelly Sigo contributed to this story.

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