Fitch Ratings affirms the rating on Tennessee Energy Acquisition Corp's (TEAC) series 2006B gas project revenue bonds at 'BBB'.
The Rating Outlook is Stable.
SECURITY:
The bonds are secured by a security interest in the trust estate pledged under the indenture, which primarily includes payments from the participants to TEAC (under the supply agreements). The series 2006B bonds have a subordinate security interest to the series 2006A bonds (rated 'A' by Fitch with a Stable Outlook).
KEY RATING DRIVERS:
Given the structured nature of this transaction and the different components of pledged revenues, the 'BBB' rating on TEAC's series 2006B gas project revenue bonds reflects Fitch's analysis of the following:
PARTICIPANT CREDIT QUALITY: The rating reflects the combined credit quality of the 26 municipal utility systems that are the purchasing utilities. Direct exposure to any single utility is mitigated by the 25% step-up provision in the gas supply contract. It is Fitch's assessment that the participants exhibit credit characteristics consistent with the 'BBB' level.
GAS SUPPLIER: J. Aron & Company is the gas supplier and remarketer for the transaction. The obligations of J. Aron are guaranteed by the Goldman Sachs Group Inc. (GSG, Issuer Default Rating [IDR] of 'A' with a Stable Outlook).
COMMODITY SWAP PROVIDER: Royal Bank of Canada (RBC; rated 'AA' with a Stable Outlook) guarantees the obligations of the commodity swap provider.
GUARANTEED INVESTMENT CONTRACT PROVIDERS: The obligations of the financial institutions (DEPFA Bank plc, rated 'BBB+' with a Negative Outlook, and MBIA Inc. providing a Guaranteed Investment Contract [GIC], for investment returns on the senior reserve subaccount, are collateralized. The obligations of the financial institutions Transamerica Life (rated 'AA-' with a Stable Outlook) and Wells Fargo & Co (rated 'AA-' with a Stable Outlook) providing a GIC, for investment returns on the junior reserve subaccount and working capital account, respectively, are not collateralized.
DEBT SERVICE FUND COUNTERPARTY: Citigroup (rated 'A' with a Stable Outlook) who invests the debt service fund has its obligations collateralized.
WHAT COULD TRIGGER A RATING ACTION
COUNTERPARTY RATINGS: The long-term rating of gas pre-pay bonds is determined by Fitch's assessment of each structure, the role of each counterparty in the structure and their credit quality. Bondholders bear the most risk from the gas supplier as the structure calls for an extraordinary redemption of bonds, under most scenarios of non-performance by any entity participating in the structure. As extraordinary redemption is an event subsequent to an earlier act of non-performance, bondholders are exposed to the credit risk of each entity in the structure and hence the rating is generally driven by the credit quality of the weakest entity. The rating on the 2006B bonds currently reflects the 'BBB' credit quality of the 26 purchasers.
CREDIT PROFILE:
TEAC issued series 2006A and 2006B bonds to prepay J. Aron, the gas supplier, for a specified quantity of natural gas, deliverable to the issuer over the life of the bonds (i.e. 20 years) and also fund reserves at the time of issuance. Bondholders rely on the supplier to deliver the gas or make a cash payment to the issuer, in lieu of gas deliveries, over the life of the bonds. The issuer, in turn, delivers the gas to the purchasing utility(s). The purchasing utilities are required to make a payment to the issuer for the gas delivered. These payments are used by the issuer to pay debt service on both series of bonds. Should the supplier fail to deliver gas or pay an equivalent amount of money, the supplier or its guarantor is required to make a termination payment to the trustee that, together with other available funds, is sized to be sufficient to redeem outstanding bonds.
In January 2012 the indenture was amended to reflect the execution of a Receivable Purchase Agreement (RPA) between J Aron, TEAC and The Bank of New York Mellon Trust Company N.A. as the trustee. Pursuant to the RPA, J Aron has agreed to purchase receivables created as a result of non-payment by a gas purchaser or the failure of DEPFA Bank plc to perform on its obligations related to the Reserve Subaccount. Fitch notes that the obligations under the RPA will only cover debt service on the 2006A series, which are senior to 2006B. Thus the rating on the 2006B bonds continues to reflect the credit characteristics of the 26 underlying gas purchasers and the 25% step-up provision.
For additional details regarding the transaction, please see the full report available on the Fitch Ratings website 'www.fitchratings.com', 'Tennessee Energy Acquisition Corp' dated Feb. 13, 2009.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Criteria for Rating Prepaid Energy Transactions' (Aug. 15, 2011);
--'Prepay Gas Transactions: Focus on Counterparty Risk' (Feb. 23, 2009);
--'Tennessee Energy Acquisition Corp' (Feb 13, 2009).
Applicable Criteria and Related Research:
Tennessee Energy Acquisition Corporation 2006A and B
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=425798
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