LOS ANGELES — A bond restructuring underway by the Southern California Public Power Authority on $371.5 million in debt could result in ratings upgrades by two rating agencies if bondholders approve the efforts.
SCPPA is a joint powers agency formed to finance the acquisition of power generation and transmission resources for its members.
Analysts from both Moody's Investors Service and Fitch Ratings said in reports they viewed favorably SCPPA's plans to change certain elements of the transaction structure for its Series 2007A and B natural gas project revenue bonds.
Moody's analysts said in a report on Tuesday that its Baa1 rating could be bumped up to A3 if bondholders approved the proposed amendments. Fitch could upgrade the rating from BBB-plus to A, based on the same factors.
Standard & Poor's analysts gave the bonds a BB rating in April with a developing outlook. S&P has not issued a new report based on the proposed amendments.
The upgrades are pending approval from the majority of bondholders to amend the transaction documents.
The bond proceeds funded the prepayment of about 135 billion cubic feet of natural gas scheduled for delivery for 30 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 currently rated Baa1 by Moody's are rated as such 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.
If bondholders approved the amendments, Moody's anticipates upgrading the bonds to the rating of Goldman Sachs Group, Inc., currently rated A3.
Fitch analysts said in a report Wednesday they have placed the BBB-plus rating for the bonds on rating watch positive; and if the proposed amendments are executed "it will likely result in an upgrade of the outstanding bonds to an A rating."
The prospective 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 planned 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 MUFJ 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.
Under the current non-amended agreement, the floating index-based revenue SCPPA receives from municipal participants is 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 is fixed for the duration of the transaction and is 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.
S&P cited two factors in giving the bonds a speculative-grade rating in its April report. The first was that payment on the bonds depends on the ability of multiple counterparties to perform under the transaction documents. Bondholders are exposed to the payment and performance risk of J. Aron, AIG-FP Broadgate, American General Life Insurance Co. and NPFG. Thus, the bond ratings could be lowered if the ratings on any of the entities mentioned change.
The other factor S&P analysts cited was that bondholders could see a decline in market price if the bonds lose their tax-exempt status because this is not an event of termination under the documents.
