| NEW YORK
NEW YORK May 4 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
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
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
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
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
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
"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.