Fitch Upgrades Clarksville Natural Gas Acquisition Corp to 'A+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the following ratings:

--$203 million Clarksville Natural Gas Acquisition Corporation (NGAC), TN, gas revenue bonds, series 2006, to 'A+' from 'A'.

In addition, the rating is removed from Rating Watch Evolving. The Outlook is Stable.

RATING RATIONALE:

--The rating upgrade and removal from Rating Watch Evolving reflects Fitch's analysis of the transaction's structure and relevant counterparties.

--The Evolving Watch was assigned Sept. 16, 2008 based on a proposed modification to the Humphreys County Utility District (HCUD; not rated by Fitch) customer insurance policy. To date the modification has not been executed.

--However, upon further review of the transaction's structure, Fitch believes that the operational reserve fund (ORF), sized at a minimum of $2.5 million, is sufficient to mitigate bondholder exposure to HCUD (maximum of $858,770).

--The transaction's rating is in line with rating of the supplier and its guarantor, Merrill Lynch and Co. (ML; rated 'A+', with a Stable Outlook by Fitch), whose performance is necessary for timely payment of debt service.

--The credit of the other counterparties, Clarksville, TN (utility revenues rated 'AA-', with a Stable Outlook), HCUD (mitigated by the ORF), and the two financial institutions that invest the proceeds of the debt service reserve (Bayerische Landesbank [BLB; rated 'A+', on Negative Watch]) and operational reserve fund (Wells Fargo [rated 'AA-' with a Stable Outlook]), support the current rating on the bonds.

KEY RATING DRIVERS:

--The long-term ratings of gas prepay bonds are determined by Fitch's assessment of each structure, the role of each counterparty in the structure, and their credit quality.

--While the modification of the customer insurance policy would eliminate bondholder exposure to HCUD, it would not result in a rating upgrade above 'A+', the current rating of ML.

SECURITY:

The bonds are special obligations of the issuer, payable solely from revenues and other funds pledged under each indenture. Revenues are derived from the fulfillment of the obligations of the supplier (BAML) and two purchasing utilities, Clarksville and HCUD. Bondholders also rely on funds pledged under the indenture which are invested by Wells Fargo and BLB.

CREDIT SUMMARY:

The proceeds of these bonds were used to prepay Merrill Lynch Commodities, Inc. (MLCI) for a specified quantity of gas to be delivered to Clarksville and HCUD over the next 20 years. Bondholders rely on the supplier to deliver gas or make a cash payment to NGAC over the life of the bonds. NGAC, in turn, delivers the gas to the purchasing utilities. The purchasing utilities are required to make a payment to NGAC corresponding to the amount of gas delivered, which is sufficient to make regular debt service payments. Should the supplier fail to deliver the gas or an equivalent amount of money, the supplier or its guarantor is required to make a termination payment to the trustee, which is sufficient to redeem outstanding bonds.

Of the two participants, Clarksville, TN, which takes 93% of the delivery, is the stronger credit at 'AA-'. HCUD takes the remaining 7%. In the event of a default by HCUD (failure by HCUD to pay for gas delivered and failure by Syncora Guaranty, the surety bond provider to make its required payment), bondholders are exposed to three months of payment obligations or approximately $858,770. This exposure represents approximately 0.5% of the total $203.3 million par amount outstanding. Bondholders benefit from the structure's ($2.5 million) operational reserve fund that could be used in the event of a HCUD payment default. The fund has never been drawn on for reasons of default. The maximum draw to date was $527,000 (January 2007, the first month of the transaction) due to a discrepancy between the actual monthly index and the MLCI's estimated index. The fund was replenished the following month, per the provisions in the transaction's documents.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in the U.S. Municipal Structured Finance Rating Criteria, this action was additionally informed by information from the Trustee.

Related Research:

'U.S. Municipal Structured Finance Rating Criteria', dated Aug. 16, 2010.

'Guidelines for Rating Prepaid Energy Transactions', dated Dec. 30, 2009.

'Public Power Rating Guidelines', dated June 11, 2009.

Related Research:

Public Power Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=447150

U.S. Municipal Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548588

Guidelines for Rating Prepaid Energy Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493366

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