Black Belt Energy Gas District's $925 million of gas project revenue bonds are the latest prepaid natural gas bonds in a growing wave hitting the market.
The Alabama-based district's bond sale is on the day-to-day calendar, with Goldman Sachs & Co. serving as the senior manager.
The deal had been planned for as early as late February, according
Deutsche Bank is the liquidity provider – it will borrow the bond proceeds from Black Belt Energy and, in exchange, make monthly payments to the gas supplier.
The series 2025B bonds are rated Baa1 by Moody's Ratings and have serial maturities from one to 11 years. BBE has the "option to extend the maturity date of the bonds by requiring bondholders to tender such bonds for purchase on or after the first business day of the twelfth month preceding the maturity dates," Moody's says.
"Pre-pay gas represents
Over the last several years prepaid gas bonds have grown from 5% to 10% of the Bloomberg Municipal Bond: Muni Inter-Short (1-10) Index, said Jeff Timlin, head of municipal strategies and managing partner at Sage Advisory, reflecting the increasing volume of prepay gas bond sales.
Energy pre-pay bond issuance was $25 billion in 2024, up 27% from the previous year, according to Pat Luby, senior municipal strategist at CreditSights. In the first two months of the year, it is up 49% over the same period in 2024. Energy pre-pay bonds include electricity pre-pay bonds as well as gas pre-pay bonds.
The natural gas model has been applied to the burgeoning sector of
Timlin said several factors have led to energy pre-pay bonds' growth: utility issuers want certainty on the price of their energy inputs; substantial demand for gas and electricity; and dislocations between the taxable and tax-exempt market have widened opportunities to sell the tax-exempt gas pre-pay bonds.
The volume of prepaid gas sales has increased over a long period of time, said Joseph Krist, publisher of MuniCredit News. What has slowed the increase has been the "dreaded termination event," Krist said. "With all the moving parts, many [bond buyers] missed potential dates and were negatively surprised when bonds got called early as a result. The institutional holder is much better equipped to follow all of the moving parts."
Municipal Capital Markets Group is the municipal advisor for the upcoming Black Belt Energy deal. Butler Snow is bond counsel. Orrick, Herrington & Sutcliffe is special tax counsel.
Black Belt Energy is a public natural gas utility jointly founded by the cities of Jackson, Thomasville, and Grove Hill, Alabama.
Timlin said he expected the 10-year maturity of the Black Belt bonds to come in a bit higher than 100 basis points over the triple-A curve.
"Exogenous factors" may affect the bonds' pricing, he said. Investors are showing a greater uncertainty in the last few weeks and that may push the spread from around 100 bps to around 115 bps, Timlin said.
Black Belt last sold bonds in December, with maturities from two to 10 years and a 31-year maturity, callable, with an A1 rating from Moody's based on BP Capital Markets' role as liquidity provider. The 10-year maturity of the bond was evaluated by BVAL at 97 basis points over the triple-A earlier this month, according to CreditSights.
"My guess is that with an investment grade rating the deal should get done relatively easily," Krist said.
"There has been a large supply of these types of deals in recent months, so many investors already own bonds in this sector and many already own this credit," said Dan Solender, partner and director of tax-free fixed income at Lord Abbett. "The issuer should be able to find good demand for the deal if it is priced appropriately since there are already bonds outstanding and the issuer is well known."
Foux said mutual funds, exchange traded funds, and single managed accounts are the biggest buyers of pre-pay gas bonds. Krist said high net worth investors would be interested in this issue.
If the rating was higher, individual investors might be buying, Solender said.
About five years ago there were only two to five buyers for these sorts of bonds but there are now about 50 buyers, Timlin said. Sage Advisory might buy some of the Black Belt bonds if the price is right.
Bond proceeds will be used to set up a deal to acquire a fixed quantity of natural gas to be delivered over 30 years. This will be done through a prepaid natural gas sales agreement between Aron Energy Prepay 56 LLC and BBE.
The "project participants," also known as customers, for the gas will pay BBE the prevailing market rate for the gas and this money will be the primary source of income for BBE to make scheduled deposits to the debt service account. Aron Energy Prepay is required to deliver a set amount of gas to BBE daily or make payments for any gas not delivered.
Goldman Sachs subsidiary J. Aron & Company LLC is to reach an agreement with Aron Energy Prepay so that J. Aron will provide set amounts of gas to Aron Energy over time.
Bond proceeds will be transferred from BBE to J. Aron and then to Deutsche Bank in the form of an upfront payment.
In exchange, Deutsche Bank will make monthly payments for gas to Aron Energy Prepay sufficient to cover Aron providing enough gas to BBE and any net payments due under a gas supplier commodity swap between BBE and the Aron Energy.
The price of natural gas doesn't impact the bonds' credit quality because of the utilization of the swap agreement, according to Sage Advisory.
The credit quality of Deutsche Bank and the providers of guaranteed investment contracts are key to the Baa1 rating, Moody's said. The investment contract providers provide for the debt service account, debt service reserve account and the commodity swap reserve account. Those providers, "if any," will be rated at a level to support the Baa1 rating of the bonds and will be identified at closing, Moody's said in its rating report.
An upgrade or downgrade of Deutsche Bank's rating would affect the prepay bonds' rating, Moody's said, as would a significant downgrade of the investment agreement providers.
Moody's in a November report on Deutsche Bank said it had a baseline credit assessment of baa2 for the bank but lifted it one notch for the junior senior unsecured debt given the results of its Advanced Loss Given Failure analysis.
The BCA is based on the bank's continued progress towards meeting its medium-term targets, stabilized capital ratios, high quality of its deposit base and prudent and well-controlled risk appetite.
For negatives, Moody's pointed to the bank's "relatively high leverage." It has a stable outlook on the bank's Baa1 junior senior unsecured debt rating.
"Given everything going on foreign relations wise and potentially economically, does the fact that the bank is foreign matter?" Krist said. "Otherwise, the combination of payment backstop and supplier/guarantor are enough to support the bonds."
