-- Texas Municipal Gas Acquisition and Supply Corp. III issued $1.4 billion series 2012 bonds to fund a new 20-year supply of discounted gas for its MuniGas affiliate.
-- Bond proceeds will finance the prepayment of a 20-year supply of natural gas from Macquarie US Gas Supply LLC (unrated), whose obligations Macquarie Group Ltd. (BBB/Stable/A-2) guarantees.
-- We are assigning the gas prepay transaction a ‘BBB’ long-term rating, linked to Macquarie Group as the guarantor under the prepaid gas agreement and funding agreement.
-- The stable outlook reflects that on Macquarie Group.
On Dec. 3, 2012, Standard & Poor’s Ratings Services assigned its ‘BBB’ rating to Texas Municipal Gas Acquisition and Supply Corp. III’s (TexGas III) $1.4 billion series 2012 revenue bonds. The rating is tied to the long-term rating on Macquarie Group Ltd., which guarantees the obligations of TexGas III’s gas supplier, Macquarie US Gas Supply LLC (MGS), under the gas supply agreement and the funding agreement. The outlook is stable.
Standard & Poor’s Ratings Services’ rating on TexGas III’s $1.4 billion gas supply revenue bonds series 2012 due 2032 is ‘BBB’. The outlook is stable. The key counterparties required to perform in the transaction but that are not necessarily a rating constraint are:
-- Macquarie Group Ltd. (BBB/Stable/A-2), which guarantees the obligation of TexGas III ’s gas supplier Macquarie US Gas Supply LLC (MGS; not rated);
-- JPMorgan Chase Bank N.A. (A+/Negative/A-1) and CitiBank N. A. (A/Negative/A-1), the fixed-price commodity counterparties;
-- Municipal Gas Acquisition and Supply Corp. (MuniGas; not rated), an affiliate of TexGas; and
-- Natixis Funding Corp., guaranteed by Natixis (A/Negative), the investment contract provider for the debt service accounts.
TexGas III is a Texas public facility corporation, created in accordance with the provisions of the Public Facility Corporation Act, Chapter 303, Texas Local Government Code. It was established in 2012 to issue bonds and acquire discounted natural gas supplies for its MuniGas affiliate to supply its municipal members. Proceeds of the $1.4 billion series 2012 bonds will fund the prepayment of an expected 405 billion cubic feet of gas scheduled for delivery to TexGas III from MGS over 20 years. Macquarie Group Ltd., which guarantees the obligations of TexGas III’s gas supplier, MGS, is also obligated to make payments on gas not delivered and to make a termination payment upon an early termination of the prepaid contract. Under a resale contract, the volumes will be sold to MuniGas at the first-of-the-month index price, minus a predetermined discount. The floating-index-based revenue that TexGas III receives from MuniGas will be exchanged through commodity swaps with JPMorgan Chase Bank and CitiBank for fixed amounts sufficient to pay interest and principal on the debt. The discount on the delivered gas is locked in for the transaction’s duration by the swaps’ economic terms and is made possible by the low cost of funding achieved by TexGas III through its tax-exempt debt issuance.
The rating on the bonds reflects our view of the following factors:
-- The ‘BBB’ rated parent Macquarie Group Ltd. guarantees MGS’ obligations under the prepaid natural gas agreement and the funding agreement.
-- If MGS fails to deliver gas for any reason, excluding force majeure, it must either reimburse TexGas III for the cost of replacement gas or pay the index price for the undelivered gas.
-- The credit risk of MuniGas is not linked to the rating on the transaction because provisions that require the remarketing of gas volumes to other qualified municipalities and because advances available through the funding agreement insulate bondholders if TexGas III experiences deficiencies. These provisions provide adequate funds for debt service payments to unwind the transaction.
-- The credit risk of the commodity swap counterparties is not linked to the rating on the transaction. An escrow account has been established that will release payment to the swap providers only after they have paid TexGas III, but does not require MGS to redirect the swap payment to TexGas III. If a swap provider fails to perform, there is sufficient funding to unwind the transaction.
-- Payment from MGS under the prepaid contract, along with other required funds, would be sufficient to redeem bonds in the event of an early termination of the prepaid contract.
-- Interest from the investment provider Natixis for the debt service accounts is not needed to pay debt service, but the funds from the account must be available to unwind the transaction if necessary.
Payment on the bonds depends on the ability of linked counterparties to perform under the transaction documents. Bondholders are exposed to the payment and performance risk of Macquarie under the gas supply and funding agreement and Natixis under the investment agreement for the debt service account.
We could lower the rating on the bonds if the rating on any of the linked counterparties falls to less than ‘BBB’. The termination of the commodity swap without a replacement will cause the transaction to unwind and will obligate MGS to make a termination payment that is calculated to be sufficient, together with funds in the debt service account and commitments by MGS under the funding agreement, to redeem the bonds.
Bondholders benefit from the funding agreement with MGS. The funding agreement provides a general commitment of funds equal to one month of senior expenses and debt service on a forward-looking basis, as well as a senior commitment of funds equal to two months of senior expenses and debt service on a forward-looking basis. The general commitment is available to pay senior expenses, debt service, and commodity swaps, and the senior commitment is available to pay senior expenses and debt service. The general commitment can be drawn without triggering a termination event, but the senior commitment would trigger a termination event, subject to cure. Such advances through the funding agreement become mezzanine loans that are subordinate to bondholders. If the transaction terminates, the bondholders would be repaid first. The funding commitments are contracted to range in total from $20 million to $64million over the life of the transaction, and Macquarie Group guarantees the obligations under the funding agreement.
The stable outlook reflects that on Macquarie Group, which guarantees the obligations of TexGas III’s gas supplier, MGS, under the prepaid natural gas agreement and the funding agreement. We could lower the rating and revise the outlook to the extent that we revise the long-term rating or outlook on Macquarie Group or if we lower the rating on Natixis and Natixis becomes the primary ratings constraint on the transaction.
Our ratings on Macquarie Group reflect the anchor stand-alone credit profile (SACP) for a bank operating mainly in Australia; plus the group’s “adequate” business position, “adequate” capital and earnings, “moderate” risk position, “adequate” liquidity, “average” funding, and its status as a nonoperating holding company.
Related Criteria And Research
-- Assessing Credit Quality By The Weakest Link, Feb. 13, 2012
-- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012
-- Methodology And Assumptions For Market Value Securities, Aug. 31, 2010
Texas Municipal Gas Acquisition and Supply Corp. III
Series 2012 rev bnds BBB/Stable