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Fitch: Municipal gas prepay bonds less volatile as bank credit quality stabilizes


From the April 23, 2014 issue of Public Power Daily

Originally published April 23, 2014

By Jeannine Anderson
Editor
Ratings of municipal bonds issued to prepay long-term supplies of natural gas have stabilized as pressures related to gas supplier guarantor credit quality and financial institution rating downgrades have eased, according to an April report from Fitch Ratings. 

The credit ratings of prepay bonds were volatile between 2007 and 2011, "as supplier guarantors, typically financial institutions, experienced multi-notch downgrades during the financial crisis," Fitch said.

"Gas prepay bonds are heavily exposed to bank credit quality since banks play multiple roles including gas supplier guarantor or credit enhancer," said Hugh Welton, director of Fitch's Public Power group. "With four of the five major gas supplier guarantors — all banks — carrying a stable outlook, we expect their stability to trickle down."

Goldman Sachs, J.P. Morgan, Morgan Stanley, and Citigroup all currently have stable outlooks from Fitch, while Bank of America's rating outlook was recently revised to negative from stable. 

Issuance of gas prepay bonds has declined significantly since its peak in 2007, primarily due to lower natural gas prices and narrow spreads between taxable and tax-exempt interest rates, Fitch said. Evolving federal regulation focused on U.S. banks' physical commodity activities could become a factor in the role financial institutions play as suppliers going forward, the credit rating agency said.

While gas prepay bonds remain a viable form of financing for municipalities, Fitch said, the company "does not anticipate a pick-up in new issuance activity without a change in these market fundamentals."

Despite high seasonal demand for U.S. natural gas and depleted storage supplies this winter, Fitch said it continues to expect long-term natural gas prices of $4.50 per mmBtu.
 

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