NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on the following bonds issued by Indiana Bond Bank (IBB):
--$228.1 million special program gas revenue bonds, series 2007A and 2007B at 'A'.
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 transaction's varied counterparties. Bondholders also rely on funds pledged under the indenture, which are typically invested by a third party.
Given the structured nature of prepaid natural gas transactions and the different components of pledged revenues, ratings generally reflect Fitch's assessment of the relevant counterparties and structural enhancements. The principal counterparties in the IBB transaction include JP Morgan Chase & Co. (JPM; rated 'A+'/Stable Outlook), BNP Paribas (BNP; rated 'A+'/Stable Outlook), Citizens Gas (CG; 'A' credit opinion), and Transamerica Life Insurance Company (AEGON; rated 'AA-/Negative Outlook).
KEY RATING DRIVERS
SOLID GUARANTEED GAS SUPPLIER: Natural gas is supplied by JP Morgan Ventures Energy Corporation (JPMVEC), whose obligations are guaranteed by JPM.
MULTIPLE GAS PURCHASERS: Gas is purchased by the three participants, the City of Batesville (4.3%), the Town of Lapel (1.2%), and Citizens Gas (94.5%). The largest purchaser, Citizens Gas, exhibits adequate financial metrics and a competitive cost structure that support the current rating on the bonds.
CASH-FUNDED OPERATING RESERVES: A cash-funded operating reserve of $7.9 million is required to be maintained and may be used to pay debt service in the event of a shortfall by any of the gas purchasers. The reserves are well in excess of the anticipated obligations of Batesville and Lapel.
STRONG COMMODITY SWAP PROVIDER: The commodity swap provider is BNP Paribas, which exhibits a strong credit profile.
INVESTMENT AGREEMENT PROVIDER: Amounts in the debt service reserve and operating fund are held in a guaranteed investment contract provided by AEGON. The investment agreement requires AEGON's obligations to be collateralized in the event AEGON is downgraded below 'AA-'.
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 each counterparty in the structure, and their credit quality.
The IBB, an instrumentality of the state of Indiana, established the Prepaid Gas Funding Program during 2007 to provide a mechanism for financing the prepayment of supplies of natural gas. In August 2007, IBB issued its series 2007 A & B bonds to prepay for specified supplies of natural gas to be delivered by JPMVEC to IBB over a 15-year period. IBB in turn loaned the proceeds to the Indiana Municipal Gas Purchasing Authority (IMGPA; or the Authority) a non-profit corporation, which sells the gas to the purchasing utilities.
The series 2007 A bonds were issued as fixed rate. The series 2007 B bonds were issued in three separate sub-series (B-1, B-2, B-3), all of which were index rate bonds. Interest rate risk has been hedged through a swap arrangement with JPM.
COMMODITY SWAP AGREEMENT TO HEDGE PRICE RISK
To hedge the risk of changes in the price of natural gas, IBB has entered into a commodity swap agreement with BNP Paribas exchanging an index-based gas price for a fixed gas price. The net swap payments will accommodate any differences between the index-based revenues of IBB from the gas purchasers, and the fixed debt-service payments on the bonds. The Gas Supplier has separately entered into matching swap agreements with BNP, exchanging a fixed price for a floating natural gas price. It is an Additional Termination Event under the ISDA if BNP Paribas is downgraded below 'A/A2' and not replaced within 60 days.
STRUCTURE DESIGNED FOR TIMELY PAYMENT
The bonds are structured with provisions which provide for timely payment of debt service, regardless of changes in natural gas prices or transportation costs, or the physical delivery of gas by the Gas Supplier (since financial payments will be due by the supplier, in the event of non-delivery of gas for any reason, including during force majeure events).
In the event that the transaction is terminated, the Gas Supplier is obligated to make a termination payment that, together with other available funds, is sufficient to pay bondholders all outstanding principal, unamortized premium and accrued interest. The JPMVEC obligation is guaranteed by JPM.
SALE OF JPM'S PHYSICAL COMMODITY PLATFORM
Fitch does not expect the pending sale of JPM's physical commodity business to Mercuria Energy Group to affect the rating on the IBB bonds. In particular, the transaction documents do not permit JPM to assign its guarantee obligations under the prepaid agreement without rating agency confirmation that the assignment would not result in a downgrade of the current rating on the IBB bonds.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Criteria for Rating Prepaid Energy Transactions', dated July 26, 2013;
--'Pre-pay Gas Transactions: Focus Shifts to Restructuring', dated April 2, 2014.
Applicable Criteria and Related Research:
Criteria for Rating Prepaid Energy Transactions
Pre-pay Gas Transactions: Focus Shifts to Restructuring