Bond Buyer Conference on Prepaid Energy Contracts

Transcription

1 Bond Buyer Conference on Prepaid Energy Contracts Gas Prepayment Bonds Pricing Related Issues Communicating and Marketing the Deal May 11, 2007

2 Panel Participants Jean Lu Senior Analyst, Vanguard 100 Vanguard Blvd. Malvern, PA John Murphy Research Analyst, Fidelity Investments 82 Devonshire Street Boston, MA / (ph.) 603/ (ph.) Robert Barber Managing Director 4 World Financial Center New York, NY robert_barber@ml.com 212/ (ph.) Mark Widener Director 3455 Peachtree Road, NE Suite 200 Atlanta, GA mark_widener@ml.com 404/ (ph.) 1

3 Gas Prepayments Since 2003 Regulatory Safe Harbor Significant Issuance with More to Come Since the 2003 Regulations were promulgated, there have been 16 gas prepayment financings Total par approaching $12 billion Most transactions carry supplier parent guarantees Secondary trading is extremely active, with several billion traded in the last few months alone Numerous transactions are set to price in 2007 Given the volume of primary and secondary trading, constant buyer education and marketing are critical to maintaining aggressive trading levels 2

4 Key Marketing and Pricing Considerations: Rob Barber

5 Key Marketing and Pricing Considerations Steps to a Successful Sale of Gas Prepayment Bonds These steps will help pique investor interest and increase the investors understanding of the structure Allow for a diverse investor base, including participation from Money Managers, Banks, Insurance Companies, Bond Funds, Retail Investors, and Hedge Funds Education Process Rating Agency Communication Investor Road Show Investor Questions Begin the education process early with the institutional sales force and potential investors through an Internal Marketing Memorandum and other related marketing materials Ensure that the rating agency press reports are released prior to the sale of the bonds this will help to complete the approval process of buyers on the proposed transaction Hold an investor road show via the internet to explain the transaction and answer investor questions attracts a significant number of institutional investors to the call Ensure that relevant team members to the transaction are available after the investor call to answer specific questions related to the transaction 3

6 Key Marketing and Pricing Considerations Case Study: Texas Municipal Gas Acquisition and Supply Corp. I, Series 2006A, 2006B, & 2006C In December 2006, Merrill Lynch served as Sole Manager on Texas Municipal Gas Acquisition and Supply Corporation I ( TexGas ), Series 2006A, 2006B, & 2006C: Series 2006A: $485,000,000 (Fixed Rate Bonds) Series 2006B: $1,850,000,000 (Index Floaters) Series 2006C: $81,620,000 (Index Floaters) The TexGas transaction was the first gas prepay to allow for municipal spot gas purchasers along with traditional long-term buyers. The transaction marked a year-long effort of structuring and development of the program by the deal team Merrill Lynch was the first to structure LIBOR-based Indexed Floaters in a gas prepayment transaction these securities pay bondholders a rate of 67% of 3-month LIBOR plus a fixed spread, and allowed TexGas to lock in a fixed rate through a 67% of 3-month LIBOR cost of funds swap The original structure included $1.8 billion in fixed rate bonds with target spreads to MMD of bps Given the high demand for Index Floaters, Merrill Lynch upsized the Series 2006B tranche to $1.85 billion, which in turn, drove down the size of the fixed rate offering and the fixed rate spreads to MMD +35 The LIBOR-based Index Floaters also generated an additional $55 million in available discounts to the municipal buyers ($0.11/MMBtu) and the structure eliminated any tax and basis risk. 4

7 Key Marketing and Pricing Considerations Case Study: Texas Municipal Gas Acquisition and Supply Corp. I, Series 2006A, 2006B, & 2006C There was heavy demand for the bonds with each maturity oversubscribed (approximately 2-8x) Investors included: Susquehanna Neuberger Berman Freddie Mac Charles Schwab US Bancorp Western Asset Management Colonial PIMCO McDonnell Investors McKai Shields Commonwealth Securities Wachovia Franklin Templeton Boston Co. West LB Prudential Bache Capra Delaware Investors T. Rowe Price American Express Evergreen Northern Trust Standish, Ayer & Wood Sun Trust Duration First Union Vanguard 5

8 Key Marketing and Pricing Considerations General Characteristics of Gas Prepayment Bonds Coupon: 5.00% % Maturities: Years 1-20 Optional Redemption: Greater of the amortized value or Make-Whole (MMD 0.25%) Extraordinary Redemption: Supplier Failure to Perform Persistent Failure to Delivery / Failure to Pay / Default by Supplier on any swap agreement / Failure to Remarket to Qualified Users for a Qualified Purpose No-Fault Events Adverse governmental action, illegality, material tax increase, taxes Investors concerns of an extraordinary redemption can potentially inhibit the trading value of these bonds 6

9 Key Marketing and Pricing Considerations Bonds Price Based on Supplier s Parent Guaranty Ratings Credit Components: Gas Supplier Participant / Customer Insurance Policy Commodity Swap Provider Transaction is structured such that the Gas Supplier s credit is the weakest link among the above counterparties Bond Pricing is, therefore, based on the underlying rating of the parent company 7

10 Trading of Gas Prepayment Bonds Market Anticipation of Future Supply Yield Curves Interest Rates 6.00% 5.50% Years to Maturity MMD Municipal Yield Curve SIFMA Municipal Swap Curve LIBOR Swap Curve Spread to MMD Spread to SIFMA 5.00% 4.50% 4.00% 3.50% % 3.57% 5.32% 0.20% 0.20% % 3.44% 5.08% 0.25% 0.32% % 3.41% 5.01% 0.30% 0.40% % 3.42% 5.01% 0.35% 0.45% % 3.45% 5.02% 0.37% 0.50% % 3.54% 5.08% 0.38% 0.50% % 3.65% 5.17% 0.38% 0.50% % 3.72% 5.23% 0.38% 0.50% % 3.81% 5.30% 0.38% 0.50% % 3.90% 5.35% 0.40% 0.50% % 3.98% 5.38% 0.40% 0.50% 3.00% MMD SIFMA LIBOR Credit Spreads Rates as of May 9,

11 Key Marketing and Pricing Considerations Credit Spread Movements in the Gas Prepay Market There are three key drivers that cause credit spread movements in this market: Credit spreads in general Supply concerns General perception of financial credits Main Street Natural Gas Maturity Spread to MMD /20/2006 1/5/2007 1/9/2007 1/10/2007 1/11/2007 2/1/2007 2/2/2007 2/15/2007 2/16/2007 2/20/2007 3/7/2007 3/29/2007 4/2/2007 5/1/2007 9

12 Key Marketing and Pricing Considerations Average Credit Default Spread History* /1/ /15/ /29/2006 1/15/2007 1/29/2007 2/12/2007 2/26/2007 3/12/2007 3/26/2007 4/9/2007 4/23/2007 5/3/2007 The credit default swap market is a loose proxy for the taxable discount rate in a gas prepayment financing * Average based on credit defaults spreads for Merrill Lynch, JP Morgan, and Goldman Sachs 10

13 One Buy-Side Perspective: Evaluating Credit Factors in a Prepaid Gas Deal Jean Lu

14 Evaluating Credit Factors in a Prepaid Gas Deal Issuer / Participant Default Fit in participant s risk mitigation/hedging program Fit in participant s fuel supply portfolio Credit quality and diversity of participants underlying ratings, ongoing disclosure Step-up or no step-up for joint power agencies Take or pay versus take and pay obligations Customer insurance policy Reserves funded by cash or surety Opportunity cost 11

15 Evaluating Credit Factors in a Prepaid Gas Deal Supplier Default Physical commodity versus trading desk obligation Hard or soft remarketing provisions Monetary penalties for temporary supply disruptions Delivery points Force majeure provisions Net and gross commitments by supplier and market 12

16 Evaluating Credit Factors in a Prepaid Gas Deal Swap or GIC Default Ratings triggers for replacement and collateral posting Reserves funded by cash or surety Balancing mechanism if no swap 13

17 Evaluating Credit Factors in a Prepaid Gas Deal Tax Issues Tax call or no tax call Management history Independence of commodity swap Qualified use Other arbitrage (competitive versus negotiated bidding), pools 14

18 Evaluating Credit Factors in a Prepaid Gas Deal Early Termination Provisions Guarantee of gas supply agreement who, what and how much is covered Optional versus mandatory early termination events Make-whole takeout 15