DALLAS - Rating analysts have placed $1.23 billion of prepaid gas bonds from Salt Verde Financial Corp. on watch for possible downgrade based on the credit rating of counterparty Citigroup.

The moves by Standard & Poor's and Moody's Investors Service follows a series of downgrades on prepaid gas deals involving bankrupt Lehman Brothers and watch list status for deals backed by Merrill Lynch & Co., expected to be acquired by Bank of America Corp. by the end of the year.

No prepaid gas deals have come to market in months as the financial banking industry's collapse has frozen the credit markets.

The Salt Verde bonds, like Citigroup, are rated AA-minus by Standard & Poor's and Aa3 by Moody's. Fitch Ratings does not rate the debt, but maintains a AA-minus on Citigroup.

The Salt Verde deal also has a guaranteed investment contract from AIG Matched Funding Corp., a subsidiary of the insurance company that recently received an $85 billion federal bailout. AIG is the GIC provider in Salt Verde gas deal with the Long Beach Bond Finance Authority and the Southern California Public Power Authority.

Under the counterparty criteria, short-term ratings of AIGMFC do not affect the rating on the gas deal, according to Standard & Poor's.

With a coupon of 5%, Salt Verde bonds maturing in 2015 were initially priced at $105.02, with a yield of 4.26%. The bonds were priced at $87.846, yielding 7.26% in recent trades, according to Thomson Municipal Market Monitor. On the long end, bonds maturing in 2037 were priced at $70.372 yesterday, with a coupon of 5% and a yield of 7.52%.

In a related action, Standard & Poor's also placed Tennessee Energy Acquisition Corp.'s $2 billion deal on negative watch because Citigroup served as GIC provider, with Goldman, Sachs & Co. as underwriter.

Standard & Poor's last week dropped its rating on the $709 million issue of Main Street Natural Gas Inc. Series 2008A project gas revenue bonds to default level, with bondholders as potentially unsecured creditors in Lehman Brothers Holdings Inc. Chapter 11 bankruptcy proceedings.

Main Street terminated its gas supply contract with Lehman Brothers Commodity Services Inc. last week after the Lehman unit failed to deliver gas for five consecutive days. As a result, the bonds are subject to a mandatory redemption at the end of the month in a transaction designed to be funded by an early termination payment from Lehman Brothers Commodity Services.

Tallahassee, Fla., the Municipal Gas Authority of Georgia, and Florida's Reedy Creek Improvement District all received gas from Lehman through the Main Street deal.

Main Street Natural Gas has three other prepaid gas issues outstanding - two supplied by Merrill Lynch Commodities Inc. and one by JPMorgan Venture Energy Corp.

The Merrill Lynch-supplied deals could be upgraded following the successful acquisition of Merrill by Bank of America, Standard & Poor's said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.