LOS ANGELES — A bond restructuring by the Southern California Public Power Authority on roughly $320 million in natural gas prepay debt resulted in ratings upgrades from two rating agencies.
SCPPA is a joint powers agency formed to finance the acquisition of power generation transmission resources for its members.
Analysts from both Moody’s Investors Services and Fitch Ratings said in reports they viewed favorably SCPPA’s plans to change certain elements of the transaction.
Fitch upgraded $321.2 million of SCPPA’s 2007 A and B gas project revenue bonds to A from BBB-plus and removed them from Rating Watch Positive; and Moody’s upgraded $317.5 million of the same bonds to A3 from Baa1 and lifted its review for downgrade.
The bonds are special obligations of the issuer, payable solely from revenues and other funds pledged under the trust agreement.
Revenues are derived from the fulfillment of the obligations from each of the transactions varied counterparties. Bondholders also rely on funds pledged under the indenture, which are typically invested by a third party.
The bond proceeds funded the prepayment of about 135 billion cubic feet of natural gas scheduled for delivery for 22 years. SCPPA will sell these gas volumes to five project participants at the first-of-the-month index price, minus a fixed discount.
Municipal participants can choose to remarket a portion of their quota of monthly gas, and historically the project has seen about 5% to 20% of gas volumes remarketed to other qualified users, according to an S&P report released in April.
The bonds were previously rated Baa1 by Moody’s based on the ratings of both AIG, Inc. and National Public Financial Guaranty Corp., as the lowest rated entities whose performance can affect timely payment of the debt service on the bonds, according to the Moody’s report.
Since bondholders approved the amendments, Moody’s upgraded the bonds to the rating of Goldman Sachs Group, Inc., currently rated A3.
The rating change reflects the expanded exposure to the transaction’s natural gas supplier, J. Aron & Co., whose obligations are guaranteed by the A-rated Goldman Sachs Group, Inc., Fitch analysts said.
The other factors driving the action include the novation of outstanding commodity swaps to Mitsubishi UFJ Securities International Plc from an affiliate of American International Group, Inc.
SCPPA also is instituting a custodial arrangement with U.S. Bank NA that will facilitate the exchange of required payments pursuant to the commodity swap agreements. The latter is expected to insulate bondholders from any failure by MUFG to pay under its swap agreement with SCPPA, Fitch analysts said.
Moody’s also cited the structure and mechanics of the amended transaction, which provide for the payment of debt service consistent with the rating assigned to the bonds.
Prior to the amendments, the floating index-based revenue SCPPA received from municipal participants was exchanged through a commodity swap with AIG-FP Broadgate for fixed amounts that are sufficient to pay interest and principal on the debt. The discount on the delivered volumes of gas was fixed for the duration of the transaction and was made possible by the low cost of funding achieved by SCPPA through its tax-exempt debt issuance.
The floating rate interest obligation of series 2007B is exchanged for a fixed rate through an interest-rate swap with J. Aron that functions similarly to the commodity swap in the transaction.
