Fitch to Rate $900MM Long Beach Bond Fin Auth Natural Gas Purchase Rev Bnds 'AA-'.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. expects to rate the Long Beach Bond Finance Authority's $900 million of natural gas purchase revenue bonds, series 2007A (fixed rate), 2007B (LIBOR LIBOR See: London Interbank Offered Rate LIBOR See London interbank offered rate (LIBOR). index rate), 2007C (SIFMA SIFMA Securities Industry and Financial Markets Association SIFMA Socialized Industrial Forest Management Agreement index rate), and 2007D (CPI Index rate), 'AA-', with a Stable Outlook, presuming pre·sum·ing adj. Having or showing excessive and arrogant self-confidence; presumptuous. pre·sum  ing·ly adv. the transaction documentation does not materially
change prior to pricing. Subject to market conditions, the bonds are
tentatively scheduled to price as early as the week of Aug. 27th, 2007,
with Merrill Lynch as the sole underwriter.
Bond proceeds will be used to prepay for a fixed quantity of natural gas to be delivered over a 30-year period by Merrill Lynch Commodities, Inc. (MLCI MLCI Maxx Logistics for Commerce and Industry ) pursuant to a Prepaid Natural Gas Purchase and Sale Agreement (Prepaid Gas Agreement) between MLCI and the authority. With respect to any variable-rate 2007 bonds issued, the authority will enter into matched floating-to-fixed interest rate swaps with Merrill Lynch Capital Services Inc.(MLCS MLCS Maritime Load Carriage System MLCS Senior Chief Molder (Naval Rating) MLCS Modern Legacy Crypto Solution (US Navy) MLCS Mega Link Channel Service ), to synthetically fix its net interest rate expense on the floating-rate bonds. Given the structured nature of this transaction and the different components of pledged revenues, the rating on the 2007 bonds is influenced by the lower rating of the following: --Merrill Lynch & Co. (ML), with a Fitch Issuer Default Rating (IDR IDR In currencies, this is the abbreviation for the Indonesian Rupiah. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. ) of 'AA-'; Stable Outlook. ML provides a guaranty of the payment obligations of the natural gas supplier, MLCI, and a guaranty of the payment obligations of the interest rate swap provider, MLCS. --Swap Counterparty with a Fitch IDR of at least 'AA-'. --XL Capital Assurance (XL), with an Insurer Financial Strength rating of 'AAA'; Stable Outlook. XL is providing limited credit support for the payment obligations of the city of Long Beach. --Yet-to-be-named guaranteed investment provider(s), with a Fitch rating of not less than 'AA-'; Stable Outlook. The gas prepay transaction is structured with legal provisions to help secure the revenue streams that provide for timely payment of principal and interest on the bonds, regardless of changes in natural gas prices, interest rates, or gas transportation costs. The performance obligation of the City of Long Beach and its gas enterprise fund, the Long Beach Gas and Oil Department (LBG LBG Local BEST (Board of European Students of Technology) Group LBG Locust Bean Gum LBG Lyman break galaxy LBG Louis Berger Group, Inc. LBG Linde, Buzo, and Gray (vector quantization method) ) are not a material factor in this rating. Unique Aspects to this Prepaid Gas Structure This may be the first 30-year gas prepay transaction. While that does not affect Fitch's credit rating for this transaction, it is a credit factor in the implied debt rating for the city's gas enterprise fund, LBG (LBG's credit rating is 'implied' as the gas enterprise fund has no direct debt outstanding). Payments for delivered gas (at specified gas index price less a fixed discount) are paid as an operating expense Operating Expense The essential things that a company must purchase in order to maintain business. Notes: For example, the payment of employees wages are an operating expense. Also known as OPEX. of the City's gas enterprise fund (LBG). However, LBG's operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. are paid on a subordinated basis to the city of Long Beach debt issued on behalf of the gas enterprise fund ($20.9 million currently outstanding). Again, this is not a material credit factor in Fitch's rating for the 2007 bonds, as there is a surety policy from XL that provides adequate credit support for the performance of the City. While there are no cash reserves Cash reserves See: Cash investments cash reserves Investment funds that are held in short-term assets such as Treasury bills and certificates of deposit until more permanent investment opportunities are available. in this transaction, ML does provide a Funding and Assignment Agreement (F&A agreement), between MLCI and the Authority, which is backed by the guaranty of ML. The F&A agreement requires full payment by ML (in most circumstances) in a mandatory redemption of the bonds. The F&A agreement also provides mandatory advances to cover certain commodity swap Commodity Swap A swap where exchanged cash flows are dependent on the price of an underlying commodity. This is usually used to hedge against the price of a commodity. Notes: payment deficiencies, and at the option of the gas supplier, the ability to advance funds to cover a general debt service deficiency on the part of the authority. Purpose The authority is a joint exercise of powers agency of California that has been organized for the purpose of financing development and acquisitions on behalf of the city of Long Beach. The city is a municipal corporation and chartered city of California, with a population of approximately 490,000. The city maintains a gas distribution utility, operating as an enterprise fund of the city, LBG. LBG provides natural gas to approximately 145,000 customers in and around the city of Long Beach. The city, pursuant to the Natural Gas Supply Agreement (GSA (1) (Global mobile Suppliers Association, Sawbridgeworth, U.K., www.gsacom.com) A membership organization of suppliers of GSM products and services. Its goal is to promote GSM as the worldwide mobile communications standard. See GSM Association and GSM. ), will be purchasing the prepaid gas from the authority for a 30-year period. This transaction allows the city to acquire a fixed supply of natural gas (equal to approximately 80%-90% of LBG's future gas needs) at a fixed discount to the natural gas index price, for the term of the agreement. The city's obligation to make payments under the GSA will be payable solely from amounts on deposit in the gas enterprise fund. Transaction Basic Mechanics The authority will pay MLCI the 2007 bond proceeds to prepay for a 30-year supply of natural gas. Under the Prepaid Gas Agreement, MLCI is obligated ob·li·gate tr.v. ob·li·gat·ed, ob·li·gat·ing, ob·li·gates 1. To bind, compel, or constrain by a social, legal, or moral tie. See Synonyms at force. 2. To cause to be grateful or indebted; oblige. to deliver specified daily amounts of natural gas to the authority beginning on Oct. 1, 2007. Pursuant to the GSA, the authority will sell the prepaid gas to the city, who is obligated to take-and-pay for the delivered gas. The price of natural gas sold to the city - at gas index price less a fixed discount - is structured to generate monthly revenues sufficient to pay debt service on the bonds, along with other funds (interest rate and net commodity swap payments). Security Interest Bondholders have a security interest in the trust estate pledged under the indenture which includes payments from the city (under the GSA), amounts receivable under the commodity swap (between the authority and RBC RBC red blood cell. RBC or rbc abbr. red blood cell RBC, n See red blood cell count. RBC red blood cells; red blood (cell) count (see blood count). ) and the interest rate swaps (between the authority and MLCS), and any other income related to the prepaid gas supply. Structure Performance If the gas supplier does not perform (fails to deliver gas), MLCI (backed by the ML guaranty) is obligated to make required financial payments to the authority, which will be sufficient to cover debt service payments or ultimately a termination payment for an extraordinary redemption Extraordinary Redemption A provision which gives a bond issuer the right to call the bonds due to a one-time occurrence, as specified in the offering statement. The circumstances could range from natural disasters and cancelled projects to almost anything else. of the bonds. In the event of a default on the part of the gas participant (the city persistently fails to take delivered gas or fails to pay for gas on timely basis), the performance of the city is supported, on a limited basis, via a surety bond provided by XL. XL is essentially providing a form of 'gap insurance', equal to the maximum gas volume specified for a three-month period at a gas index price of up to $40/MMBtu. The surety bond is sized to adequately cover the participant's gas payments (which are structured to meet debt service payments on the bonds) until the gas supplier can remarket the gas and use the gas resale proceeds for the required payments to meet debt service. With respect to the commodity swaps, the Prepaid Gas Agreement is structured such that bondholders take the risk of a payment default by the commodity swap counterparty, for reasons such as the swap counterparty's failure to pay or bankruptcy (refer to the Master ISDA ISDA See: International Swap Dealers Association Agreement for the complete list of the commodity swap provider's events of default). However, if the commodity swap is terminated due to a default caused by an event essentially beyond the swap provider's control (such as, a change in tax law or other applicable law), the F&A would cover the commodity swap deficiency. If there is a shortfall in the interest swap payments, the guarantor (ML) is supporting the performance of MLCS. Early Termination Risk Bonds are subject to mandatory redemption prior to maturity for a variety of reasons. Bondholders are required to be paid principal and accrued interest to the redemption date plus unamortized premium in the event of such a mandatory redemption. Triggering events vary, but most are at the option (not automatic) of the gas purchaser or supplier. Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used. In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide. of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental are also available from the 'Code of Conduct' section of this site. |
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