NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Utility Contract Funding, LLC's (UCF, the project) approximately $829.3 million senior secured bonds at 'A-'. The rating is a direct link to the project's lowest rated counterparty. The Rating Outlook remains Stable.
KEY RATING DRIVERS
-- Counterparty Linkage: The rating of the bonds is dependent on the credit quality of PSE&G and Morgan Stanley. Due to the structural balance of the power purchase agreements (PPAs), the risk exposure is effectively limited to PSE&G's payment under the amended and restated PPA, and Morgan Stanley's guarantee of MSCG's payment of liquidated damages under the mirror PPA. Accordingly, the rating of the bonds is constrained by the lower counterparty credit rating of PSE&G ('A-'/Outlook Stable) or Morgan Stanley ('A'/Outlook Stable).
-- Revenue and Cash Flow Stability: UCF has stable and predictable cash flows due to the fixed capacity and energy rates under both the amended and restated PPA and the mirror PPA. The amended and restated PPA also ensures sufficient revenues to cover MSCG capacity and energy payments as well as annual debt service. (Revenue and Supply Risk: Stronger).
--Lack of Operational Risk: There is no performance risk associated with this transaction due to the obligation by MSCG to schedule, sell and deliver annual quantities of energy or pay liquidated damages as set forth by the mirror PPA. The liquidated damages payable to UCF are sufficient to pay liquidated damages to PSE&G and cover debt service. (Operating Risk: Stronger).
--Debt Structure: The debt is structured to amortize over the life of the agreements with a five month tail. A liquidity reserve currently sized at $27 million is sufficient to cover this tail. Additionally, the liquidity reserve helps to smooth cash flows for the semi-annual payments. (Debt Service: Midrange).
-- Debt Service: The project cash flows have been sized to meet 1.0x debt service coverage which is adequate for the investment grade rating given the contractual nature of the project.
--The rating will change if the rating for PSE&G or Morgan Stanley is downgraded below 'A-' or if PSE&G's rating is upgraded.
The bonds are secured by a first security interest in all rights, title and interest in all assets, including the right to sell energy to PSE&G, the right to purchase energy from Morgan Stanley Capital Group, the Morgan Stanley guarantee and all cash accounts.
UCF is an indirect, wholly owned subsidiary of JPMorgan Chase & Co. JP Morgan is rated 'AA-' with a Stable Outlook by Fitch. UCF was formed in August 2001 solely to obtain and fulfill the rights and obligations under an amended and restated PPA. The proceeds from the issuance were primarily used to reimburse the original owners' costs of obtaining and restructuring the PPA and to fund accounts required under the bond indenture.
UCF is a special-purpose entity created to sell electric energy and capacity to PSE&G under a long-term 15-year PPA. UCF purchases the energy and capacity from MSCG, a wholly owned subsidiary of Morgan Stanley, under a mirror PPA with substantially similar terms. The difference between the price at which energy is purchased from MSCG and sold to PSE&G is favorable to UCF, providing cash flow to pay debt service. Both PPAs are structured to allow for payment of liquidated damages in lieu of delivering energy or capacity. Morgan Stanley has guaranteed MSCG's payment obligations under the mirror PPA.
UCF has no employees. All management and accounting functions are provided by an affiliate, Arroyo Power GP Holdings LLC, an indirect wholly owned subsidiary of JP Morgan, under an administrative services agreement. All electricity scheduling functions are performed by MSCG under the mirror PPA. UCF has no physical assets. The material assets of UCF consist of the PPA with PSE&G, the mirror PPA with MSCG, UCF's interest in cash accounts administered by the Trustee, and various guarantees and support agreements.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', 11 July 2012.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance