NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating on Municipal Energy Acquisition Corp.'s (MEAC) series 2006 A&B bonds.
The Rating Outlook is Stable
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 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. MEAC's principal counterparties include JP Morgan Chase & Co. (JPM; rated 'A+' with a Stable Outlook by Fitch) and BNP Paribas (BNP; rated 'A+' with a Stable Outlook).
KEY RATING DRIVERS
STRONG GAS SUPPLIER SUPPORT: Gas is supplied to MEAC by J.P. Morgan Ventures Energy Corporation (JPMVEC), whose obligations are guaranteed by JPM.
COLLATERALIZED COMMODITY SWAP OBLIGATIONS: BNP is the commodity swap provider. BNP's obligations under the commodity swap agreement have been partially cash collateralized.
BROAD SUPPORT FROM JPM: The rating also reflects the further enhancement provided by JPM through a mandatory receivables purchase agreement. This mitigates the credit risk associated with various other counterparties in the transaction, including the gas purchasers and the guaranteed investment contract providers.
GUARANTEED INVESTMENT CONTRACT TERMINATED: MEAC's reserve fund guaranteed investment contract with Citigroup Financial Products Inc. was terminated during 2012. Funds have been invested in the local government investment pool managed by the State of Tennessee. TransAmerica Life Insurance Company (AA-/Stable) continues to be the investment agreement provider for the debt service fund.
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 the counterparties in the structure, and their credit quality.
The proceeds of the MEAC bonds were used to prepay the gas supplier (JPMVEC) for a specified quantity of natural gas, deliverable to the issuer over the 12-year life of the bonds. Bondholders rely on the supplier to deliver the gas or make a cash payment to the issuer over the life of the bonds. The issuer, in turn, delivers the gas to the purchasing utilities - 19 municipal gas utilities located throughout Alabama, Kentucky, Louisiana, Mississippi and Tennessee. The purchasing utilities are required to make a payment to the issuer for the gas delivered which together with other payments, including those required under the commodity swap agreement, should be sufficient to meet debt service requirements.
COMMODITY SWAP AGREEMENT TO HEDGE PRICE RISK
To hedge the risk of changes in the price of natural gas, MEAC entered into a commodity swap agreement with BNP, exchanging an average daily gas index price for a fixed price equal to debt-service requirements. JPMVEC has separately entered into a matching swap agreement with BNP, exchanging a fixed price for an average daily gas index price.
Following BNP's downgrade below 'AA-', BNP was required to either post sufficient collateral or assign all of its rights and obligations to an acceptable party. During September 2012, MEAC executed a collateral agreement with BNP requiring BNP to post collateral covering up to 2 months of settlement payments. If BNP is downgraded further to below 'A-'/'A3', it must assign all of its rights and obligations to a party rated 'AA-'/'Aa3' or higher within 30 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 even the physical delivery of gas by JPMVEC (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).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Criteria for Rating Prepaid Energy Transactions' (July 10, 2014);
--'Prepay Gas Transactions: Focus Shifts To Restructuring'
(April 2, 2014).
Applicable Criteria and Related Research:
Criteria for Rating Prepaid Energy Transactions
Prepay Gas Transactions: Focus on Counterparty Risk