Standard & Poor's Tuesday dropped its rating on the $709 million issue of Main Street Natural Gas Inc. Series 2008A project gas revenue bonds to default level, following a series of events that could potentially leave bondholders as unsecured creditors in Lehman Brothers Holdings Inc. Chapter 11 bankruptcy proceedings.
Main Street terminated its gas supply contract with Lehman Brothers Commodity Services Inc. earlier this week after LBCS failed to deliver gas for five consecutive days. As a result of the termination, 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.
But it is unlikely LBCS or the guarantor - Lehman Brothers Holdings - will pay, leaving bondholders and the issuer as unsecured creditors, Standard & Poor's said. Fitch Ratings yesterday downgraded the bonds to C from CCC because of Lehman's failure to deliver gas.
Most of the proceeds in a prepaid gas transaction go to the gas supplier in return for a long-term contract in which it agrees to supply gas or reimburse an issuer for the cost of it. The gas supplier may use the proceeds as it chooses.
The prepaid gas bonds' ratings are usually tied to the lowest-rated counterparty in the deal. In this transaction, Lehman acted as the supplier and the gas purchase agreement guarantor.
The bonds' trading values have plummeted in recent weeks as Lehman's financial position deteriorated, according to trades reported to the Municipal Securities Rulemaking Board. A dealer bought from a customer Tuesday Main Street Gas 6s of 2022 at a price of 19 cents on the dollar, equivalent to a yield of 33.496%. Although sparsely traded, the bond traded as high as 97.692 cents per dollar, or a yield of 6.250% earlier this month.
Lehman serves as the supplier on no other prepaid gas transactions rated by any of the rating agencies.
Tallahassee, Fla., the Municipal Gas Authority of Georgia, and Florida's Reedy Creek Improvement District all received gas from Lehman through this Main Street Natural Gas deal. They will lose the discount on gas they gained from issuing the tax-exempt bonds.
However, Standard & Poor's said in a comment yesterday that rating actions on financial institutions causing downgrades to prepaid gas transactions "will not affect the ratings on utility systems of municipal offtakers taking part in these transactions."
"In the event the supplier fails to deliver the physical commodity, the municipal utility must negotiate a new gas supply arrangement from an alternate supplier, and will not realize the original transaction's discounted gas price," the rating agency wrote. "Standard & Poor's believes the impact of an unwinding prepaid gas transaction will not materially affect a utility's financial performance or credit quality."
Fitch yesterday affirmed the A-plus rating on the Municipal Gas Authority of Georgia's approximately $110 million of outstanding Gas Revenue Portfolio III bonds, noting the "contract accounted for only 4% of the authority's requirements and has been covered through market purchases."
Main Street Natural Gas has three other prepaid gas issues outstanding - two supplied by Merrill Lynch Commodities Inc. and one by JP Morgan Venture Energy Corp.
The Merrill Lynch-supplied deals - currently rated A on developing watch - could be upgraded following the successful acquisition of Merrill Lynch by Bank of America Corp., Standard & Poor's said.
