Investors in Lehman-linked gas bonds get 49 cts per $1

NEW YORK Thu May 3, 2012 8:41pm EDT

NEW YORK May 4 (Reuters) - Investors in over $700 million in gas bonds issued for a Georgia utility that defaulted as a casualty of the Lehman Brothers bankruptcy were paid 49 cents on the dollar by the bankruptcy trustee in April for a total of $372 million.

BNY Mellon Corporate Trust filed a notice with the Municipal Securities Rulemaking Board notifying bondholders of the payment on April 23 out of claims for around $722 million.

"This is the initial distribution from the bankruptcy," said Kevin Heine, a spokesman for BNY Mellon.

While outstanding bonds are still trading on the secondary market, because investors can hope for more payments, it is uncertain when and how much more they can collect.

"It's anticipated that we as the trustee will continue to receive additional distributions from the Chapter 11 cases from time to time, which means there is still remaining value in these bonds, assuming these distributions take place," he said.

Prepaid natural gas bonds had developed into a $30 billion niche of the U.S. municipal market when they were sideswiped by the 2008 credit crisis.

The deals were designed to help utilities manage their energy bills by prepaying for supplies of natural gas. Banks reaped double-edged profits by underwriting the debt and supplying the fuel via their commodity arms.

Working with Lehman Brothers, the Municipal Gas Authority of Georgia used a conduit, Main Street Natural Gas Inc, to issue prepaid gas bonds in the spring of 2008.

When Lehman declared bankruptcy on Sept. 15, 2008, due to its tumbling investments in mortgage securities, one of its entities stopped delivering the gas or the cash it owed to Main Street, prompting the default, according to Joann Hempel, a Moody's Investors Service vice president.

On April 30, Main Street natural gas bonds maturing in 2038 and carrying a 6.375 percent coupon, changed hands at prices ranging from 33.046 cents on the dollar to 57.085 cents, according to EMMA, the database of the Municipal Securities Rulemaking Board.

That was quite a plunge from the 86.50 cents on the dollar that the issues traded at on April 19 - four days before the payment date for some of the bondholders' claims.

New issues of prepaid gas bonds have been sparse since the 2008 credit crisis. "The market for them was not terribly favorable in the last few years," said Dennis Pidherny, a Fitch Ratings senior director.

That is partly because counterparties that participate in the commodity swaps that are part of these deals have yet to recapture their top ratings.

"The relative cost of the borrowings may have gone up as the ratings of the gas supplier have gone down," the Fitch analyst said.

Nebraska's Central Plains Energy Project broke a dry spell last month when it tapped the market for $609 million of debt.

The sale was well received, and it offered investors a top yield of 5.05 percent in a 2042 maturity that carried a 5 percent coupon.

But it does not appear likely that yield-hungry investors can look forward to a rush of this kind of debt.

Bhala Mehendale, a director with Fitch Ratings, noted that the collapse of bond insurers during the credit crisis means that "only larger credit worthy municipal entities" are able to sell prepaid gas bonds.

Another problem are possible reductions in the ratings of some financial institutions. Moody's noted in its rating of the Central Plains gas bonds that four Goldman Sachs entities involved in the deal are all rated A1 and under review for downgrades.

Yet another complicating factor that affects these transactions is the thin spread between tax-free and taxable interest rates, which helps determine whether the deals are economic.

"As a rating agency we are not in the business of forecasting yields but in the current market where taxable and tax-exempt yields are nearly on par it appears unlikely that there will be a flood of issuance similar to 2006-07," the Fitch analyst said by email.

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