A Fitch Ratings criteria change resulted in a one-notch rating hit for about $5 billion of Ohio-based American Municipal Power Inc.'s project revenue bonds.
Fitch downgraded four of the six AMP project revenue bonds it rates, with one project dropping to BBB-plus.
The downgrades were prompted by the criteria changes impacting the way Fitch views purchaser credit quality.
Dennis Pidherny, a Fitch managing director, said that following the criteria change the rating agency places a much greater focus on both balance sheet leverage and off balance sheet leverage as well as for certain of the power projects a greater emphasis on looking at the credit quality of the purchasers of that project's power.
“The combination of those two led us to the conclusion that there was a little higher leverage here than we had originally anticipated and that the credit quality of some of the largest purchasers, in our view, was weaker, particularly given their financial leverage, than perhaps we had originally anticipated,” Pidherny said.
The purchaser credit quality assessment is based on an independent review of the larger individual systems while incorporating a pooled rating approach to determine the project's ability to withstand potential payment defaults from the participants.
Fitch took a look at roughly 20 of the largest AMP purchasers and completed credit reviews on those entities.
“It confirmed our concern that their credit quality was just a tad weaker than we had thought originally,” Pidherny said. “Pursuant to new criteria there is that much greater focus on not just guessing the credit quality of some of those purchasers but actually completing reviews and putting together formal, private opinions on the credit quality of some of those larger purchasers.”
The bonds are secured by and payable solely from gross receipts including payments made by the project participants under the power sales contracts and other funds established pursuant to the indenture.
Pidherny said that the projects are structured to have a pool of purchasers. Payments from the project participants are made pursuant to take-or-pay power sales contracts.
The power sales contract obligations are absolute and unconditional obligations, and paid ahead of each participant's own direct debt. The contracts provide for full unconditional cost recovery from the participants, but there is a limited reallocation of defaulted costs in case of participant default.
“That means there is only a limited amount of additional charge that you can impose on the purchasers,” Pidherny said.
AMPs combined hydroelectric project bonds were downgraded to BBB-plus from A-minus. Debt related to the project consists of eight series of bonds totaling $2.2 billion as of fiscal year-end 2018. All of the bonds are fixed rate, long-term amortizing obligations. Series 2009B bonds have a large term bond maturing in 2044 that is subject to mandatory sinking fund payments in the years leading up to final maturity.
AMP owns 100% of the combined hydro project and sells output to 74 municipally-owned electric systems. The three of the largest are Cleveland Public Power, the city of Danville, Virginia, and Paducah Power System, Kentucky, which combine for over 30% of total project obligation.
Fitch also downgraded another $2.7 billion of revenue bonds to A-minus from A. Included in that are $1.5 billion outstanding issued for the Prairie State Energy Campus that suffered construction delays that drove its costs up. The coal-fired project has recovered and is now up to speed in energy production.
PSEC's five largest participants include Danville, Hamilton, Ohio, Bowling Green, Ohio, Cleveland Public Power and the city of Piqua, Ohio, which combine for over 40% of total project obligation.
The rating agency also affirmed the A rating on $190 million of outstanding project bonds. The outlook on all of the bonds ratings is stable.
“The mix if participants in each of the projects is slightly different which is why it also resulted in slightly different ratings for the projects,” Pidherny said.
