RPT-Fitch upgrades Southern California Public Power Authority's gas project revs to 'A'; outlook stable
Sept 19 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has upgraded Southern California Public Power Authority's (SCPPA) outstanding $321.2 million series 2007 A and B gas project revenue bonds to 'A' from 'BBB+'. The rating is removed from Rating Watch Positive where it was placed on July 31, 2013. The Rating Outlook on the bonds is Stable.
The bonds are special obligations of the issuer, payable solely from revenues and other funds pledged under the trust agreement. Revenues are derived from the fulfillment of the obligations from each of the transactions varied counterparties. Bondholders also rely on funds pledged under the indenture, which are typically invested by a third party.
The rating action follows SCPPA's receipt of bondholder consent for amendments to certain elements of the transaction structure and participants. Principle changes include (i) the novation of all outstanding commodity swaps to Mitsubishi UFJ Securities International plc (MUFJ; not rated) from an affiliate of American International Group, Inc. (AIG; rated 'BBB+'/Stable Outlook) and (ii) instituting a custodial arrangement with U.S. Bank NA (USB; rated 'AA-'/Stable Outlook).
Other amendments, including changes to the J. Aron & Co. receivables purchase agreement (RPA) and investment agreement provider for the debt service account, result in expanded bondholder exposure to J. Aron and its guarantor, Goldman Sachs Group, Inc. (GSG; rated 'A'/Stable Outlook).
Following the amendments, the principal counterparties in the SCPPA Project No. 1 transaction include GSG, MUFJ, USB and the five municipal gas purchasers - Anaheim, CA ('AA-'/Stable Outlook), Burbank, CA, Colton, CA), Glendale, CA ('A+'/Negative), and Pasadena, CA ('AA'/Stable Outlook).
KEY RATING DRIVERS
EXPANDED SUPPORT FROM GSG: The rating upgrade reflects the expanded exposure to the transaction's natural gas supplier, J. Aron whose obligations are guaranteed by GSG.
COMMODITY SWAP PROVIDER CUSTODIAL ARRANGEMENT: Credit exposure to MUFJ is mitigated by the custodial arrangement with USB that facilitates the exchange of required payments, effectively insulating bondholders from any failure by MUFJ to pay under its swap agreement with SCPPA.
STRONG GAS PURCHASERS: Delivered gas is purchased by the five municipal participants, which collectively exhibit credit quality that supports the current rating. Executed amendments to the RPA have expanded credit support for the cities of Burbank, Colton, and Pasadena further mitigating any payment risk related to these participants.
REVISED INVESTMENT AGREEMENT PROVIDER: J. Aron (guaranteed by GSG) has replaced American General Life Insurance Co. of Delaware (AGL; rated 'A+'/Stable Outlook) as investment agreement provider for the debt service account. AGL will continue to provide the working capital account investment agreements; AGL's obligations remain collateralized.
CHANGE IN COUNTERPARTY RATINGS: The long-term rating on the bonds will continue to be determined by Fitch's assessment of the transaction structure, the role of the counterparties in the structure, and their credit quality.
SCPPA issued the Project No. 1 bonds in October 2007 to prepay for a specified supply of natural gas to be delivered by J. Aron over a period of approximately 22 years. Pursuant to separate project Gas Supply Contracts (GSC), SCPPA sells the natural gas to the five project participants each of which are obligated to purchase delivered gas as an operating expense of their respective systems.
SCPPA and GSG have completed amendments to the Project No. 1 bonds which have accomplished four principal objectives and reshaped the risks to bondholders.
The principal changes are summarized as follows:
--Outstanding commodity swaps have novated to MUFJ from AIG and a custodial arrangement has been implemented on the 'back-end' commodity swap agreement between MUFJ and J. Aron. The custodial agreement provides for all required payments made by J. Aron on the 'back-end' swap to be remitted directly to SCPPA in the event that MUFJ fails to make the corresponding required payment to SCPPA on the 'front-end' commodity swap. In short, the arrangement mitigates the risk on non-payment by MUFJ as swap counterparty.
--The RPA and the related GSG guaranty will be expanded to provide additional credit support for the cities of Burbank, Colton, and Pasadena in the event that any of these purchasers fails to pay for delivered gas.
--J Aron has replace AGL as investment agreement provider under the debt service account. J Aron's obligations are guaranteed by GSG. J Aron is not required to collateralize its obligations under any circumstances.
--The gas purchase agreement has been amended to eliminate the seller default provision if GSG fails to maintain investment grade ratings from Moody's and S&P. Although this change exposes bondholders to greater risk related to declining credit quality at GSG, it does not affect the current rating on the Series 2007 A and B bonds.
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