With a giant public-sector bond-backing firm, MBIA Insurance Corp., dodging a potential credit downgrade tied to the subprime mortgage meltdown, two California public power financing arms could breathe a little easier concerning $1.4 billion of bonds for pre-pay long-term natural gas purchases they helped finance last year. However, a third a third muni gas pre-pay deal by the City of Long Beach Bond Finance Authority was hit with a downgrade Wednesday.

Standard & Poor’s Ratings Services (S&P) said MBIA’s coming off CreditWatch with a negative outlook has no effect on the gas deals’ ratings of Southern California California Public Power Authority (SCPPA) and Northern California Gas Authority (NCGA), but because the rating of Long Beach’s debt service firm, XL Capital Assurance Inc. (XLCA), took a hit, the Long Beach authority had its senior secured bond rating dropped to “A-” from “A+” on $887 million in revenue bonds, along with being placed on “CreditWatch negative.”

Earlier this month (Feb. 13), with roiling financial markets spilling over to public-sector bond market players, S&P twice issued negative outlooks for some of the counterparties while affirming the ratings on more than $2.2 billion in bonds by SCPPA, NCGA and Long Beach regarding three California municipal utility pre-paid natural gas deals. The ratings firm initially commented on the issue in the first week in February (see Daily GPI, Feb. 15).

Neither the ratings nor the outlooks on the two muni financing arms are affected, S&P said, noting that the NCGA’s rating on its pre-pay transaction is currently tied to the rating of its gas supplier, Morgan Stanley Capital Group Inc., which is guaranteed by the parent, Morgan Stanley. MBIA is the debt service reserve and working-capital surety bond provider for NCGA’s $88.6 million in series 2007A gas revenue bonds and $668.5 million in series 2007B gas project revenue bonds.

Noting that Long Beach bondholders rely on XLCA to cover debt service and commodity swap payments in case of a municipal participant’s default, S&P said the bonds under the pre-paid gas deal are not supported by a “full-faith and credit pledge” of the City of Long Beach, or the general fund of the city. “The monthly payments under the prepaid transaction are only supported by the contractual revenues received from the city’s gas utility, which is not rated by S&P,” the rating service said in announcing its downgrade.

S&P analyst Kenneth Farer said the credit rating agency “could resolve the CreditWatch listing and potentially revise the ratings if structural modifications are made to the surety policy” more in accordance with S&P counterparty criteria, or the credit quality of the underlying municipal participants becomes more certain.

Elsewhere, SCPPA’s gas supplier is J. Aron & Co., whose obligations are guaranteed by Goldman Sachs Group Inc. MBIA is the debt service reserve surety bond provider on SCPPA’s $303 million series 2007A gas project revenue bonds due in 2033, and another $201.5 million series 2007B gas project revenue bonds due in 2038. S&P said it could revise the ratings on the debt if the rating on one of SCPPA’s other counterparties became what it called “the primary ratings constraint on the transaction.”

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