Kentucky issuer is bringing $834 million of Baa2 prepaid gas bonds
5 min read
Bloomberg News
The Public Energy Authority of Kentucky is expected to price $834 million in Baa2-rated prepaid natural gas bonds as soon as next week, continuing the wave of these bonds in the municipal market.
Moody’s Ratings rates the bonds Baa2 based primarily on the credit quality of Jefferies Financial Group as guarantor of the funding agreement. Jefferies is also the sole underwriter of the bonds.
CreditSights analysts said Friday they believed the deal to be the first energy prepay bond in which Jefferies is the lead manager and the first time Jefferies is providing the funding agreement.
The deal “should get some interest because it’s lower rated than other prepays in the market,” said Pat Luby, senior municipal strategist at CreditSights.
Luby said his speculation is that when PEAK looked for guarantors for the bonds, higher rated entities might have already decided they didn’t want further exposure to prepay energy bonds.
In prepaid gas deal, public utilities secure a long-term supply of natural gas at a discounted rate, made possible by the tax-exemption on the bond interest. The rating of the deal rests on the credit of the funding agreement provider — Jefferies in PEAK’s coming deal.
Jefferies may have given PEAK a deal on its fees because the financial firm is interested in taking steps to enhance its prepaid energy field activities, Luby said. He speculated this was why PEAK chose to go with Jefferies despite Jefferies’ lower rating.
PEAK has 13 prepay transactions and by using Jefferies it will diversify the guarantor mix, said Dan Aschenbach, principal consulting partner at AGVP Advisory. Jefferies has lots of experience in the natural gas sector, he said.
Jefferies is a reputable company but the rating means investors will want more yield than they would if another company was guarantor, said Jeff Timlin, managing partner and portfolio manager at Sage Advisory Services. He said Sage would consider buying some of the bonds if the compensation was enough for the perceived and real risks.
Aschenbach said he expects market reception to the PEAK bonds to be strong.
There are a limited number of investment firms buying prepay gas bonds and they will be interested in the deal, Luby said. Low duration mutual funds and exchange traded funds would be among the customers.
The planned PEAK 2025 Series B bonds are part of
Natural
Energy prepay bond issuance was $24.6 billion in 2024, up 27% from the previous year, Luby said. In the first two months of the year, it was up 49% over the same period in 2024. Energy prepay bonds include electricity pre-pay bonds as well as gas prepay bonds.
The total of prepay bonds outstanding in March was $84 billion, according to CreditSights.
PEAK priced $1.2 billion of 2025 Series A bonds in February with a similar structure but with Morgan Stanley as the underwriter and guarantor. Moody’s rated the bonds A1. The series A bonds were refunding while the series B are new money.
The Series B bonds will be structured with serial maturities from May 2027 to May 2033. There will also be a term bond due May 2056 subject to mandatory tender on May 2033. Moody’s says its Baa2 rating terminates May 2033 because Jefferies’ funding agreement ends then.
Bloomberg News
Bondholders tendering their term bonds in 2033 are to receive all principal and interest due.
The Series A bonds were like the Series B bonds in consisting of serial bonds maturing over a few years, a term bond around 30 years out and the term bond subject to a mandatory tender in the early 2030’s.
With the Series A bonds 97% of the initial par of the bonds was to mature with the term bond with the remaining maturing in the serial maturities December 2025 through December 2029. As of Wednesday, PEAK hadn’t announced the size of Series B’s different maturities.
In the deal PEAK will issue the bonds to finance a prepayment to the gas supplier, GNM Energy Prepay I LLC, for 30 years of natural gas deliveries, provide capitalized interest and pay issuance costs. GNM commits to delivering a certain amount of gas each month, make payments for any gas not delivered or taken, and make a payment if there is an early termination.
GNM will loan this to Jefferies under the funding agreement. Jefferies will then provide scheduled amounts to the gas supplier sufficient to meet Jefferies monthly gas purchase obligations, net of payments received under the gas supplier commodities swap.
GNM Energy will purchase gas supply on a pay-as-you-go basis from Citadel Energy Marketing for amounts found in the prepaid agreement. Citadel is to provide GNM with all gas remarketing and other services needed for GNM to meet its obligations under the prepaid agreement.
PEAK will sell all the gas it receives to the project participant, Citizens Energy Group, on a pay-as-you-go basis and at a contracted price. Citizens will make payments to generate sufficient revenues (net of swap payments/receipts) for PEAK to make the scheduled debt service deposits.
Citizens is a gas utility distribution system serving Indianapolis and Marion County in Indiana. It has about 285,000 residential, commercial, industrial and electric generation customers.
Finally, the deal includes commodity swaps between BP Energy Company, the commodity swap counterparty, and PEAK and GNM. PEAK will pay an index and receive fixed prices with respect to any natural gas it sells at floating index prices under the gas supply contract. GNM will pay fixed and receive an index for the same gas quantities.
Moody’s pointed to the credit quality of Jefferies, which it rates Baa2, as guarantor of the funding agreement, the credit quality of the investment agreement provider and the structure and mechanics of the transaction which provide payment of debt service.
In addition to the federal tax exemption, bond interest is exempt from Kentucky state taxes.
Municipal Capital Markets is the municipal advisor on the deal and Orrick, Herrington & Sutcliffe is the special tax counsel.
