CHICAGO - In what will be the first prepaid gas bond sale in more than a year, the Central Plains Energy Project is expected to bring $718 million of variable-rate revenue bonds to market tomorrow.
Tuesday's transaction carries the triple-A rating and top short-term rating of RBC Capital Markets. RBC is acting as underwriter, remarketing agent, gas supplier, and liquidity supplier on the transaction.
The deal includes a pair of interest-rate swaps with RBC, in addition to the standby bond purchase agreement. Under the first swap, CPEP will pay RBC a fixed-rate while receiving variable-rate payments in return equal to the variable interest-rate on the bonds. Under the second swap - which is where the issuer expects to gain most of its benefit - CPEP will pay RBC a variable rate based on a short-term tax-exempt index and receive a taxable short-term index rate.
Goldman, Sachs & Co. also is part of the underwriting team. Orrick, Herrington & Sutcliffe LLP is bond counsel. JPMorgan Chase & Co. is the counterparty on the commodity swap, which allows the issuer to hedge future gas prices.
The bond sale comes after issuance for prepaid gas bonds came to a standstill as the sector suffered twin blows last year - credit market turmoil and turbulent gas prices. Credit analysts late last year and early in 2009 downgraded billions in prepaid gas bonds due to the failure of investment banks, which acted as gas suppliers in such deals.
The CPEP variable-rate securities feature a 30-year maturity and will be re-marketed weekly. CPEP will use proceeds from Tuesday's bond sale to prepay RBC for the delivery of gas on a monthly basis over a 30-year period.
In assigning its top long- and short-term ratings to the deal primarily based on RBC's credit, Moody's Investors Service noted that bondholders are exposed to credit risk more comparable to structured and corporate debt financings in the taxable market rather than traditional tax-exempt market risk. The rating is based on RBC as well as the structure and mechanics of the transaction, said analyst Joann Hempel in a report on the deal.
Despite the sector's recent struggles, the CPEP finance team is confident the bonds will be attractive to investors - namely large institutional money market funds - due to the strong rating and liquidity, said RBC banker Garth Salisbury.
"We anticipate that the project will be readily accepted by investors because of two factors," said Salisbury. "One is the high rating of RBC, which is also providing the liquidity facility, and the second is, as a consequence of the VRDB structure the investor is not taking a long-term risk."
Issuance in the sector is likely to remain relatively low, Salisbury added. "We do not expect to see the type of volume in prepaid gas bonds that we have seen in the past," he said. "Very few firms have all of the products necessary to execute this transaction."
The 30-year maturity on the bonds reflects issuers' increasing interest in locking in long-term gas contracts, Salisbury said. "The gas prepaid market has evolved into a long-term market," he said. "The first deals that were done, back in the '90s, were quite short, seven to 10 years. The market has now evolved and the last few deals have been 30-year transactions."
CPEP's participants on the project include the Omaha Metropolitan Utilities District, the Cedar Falls, Iowa, Municipal Gas Utility, and the city of Hastings, Neb.
Formed in 2006, CPEP has $536 million of outstanding gas project revenue bonds, all of which were issued in 2007. Those bonds were downgraded by both Moody's and Fitch Ratings earlier this year.
Meanwhile, the issuer is waiting to argue an appeal before the Nebraska Supreme Court this fall stemming from a 2006 lawsuit. The lawsuit alleged that the Nebraska Municipal Power Pool and three of its executives had created the CPEP with proprietary information from the American Public Energy Agency, a gas purchaser and bond issuer.
In July 2008 a judge in the Lancaster County, Neb., County District Court ruled against the NMPP and the three executives, who were ordered to pay damages. The state Supreme Court is expected to hear the issue in early October 2009, according to bond documents.
RBC declined to comment on the litigation.