With global insurance provider American International Group (AIG) continuing to cast a dark shadow over Wall Street, Standard & Poor’s Ratings Services (S&P) Thursday said it was changing the outlook on two major Southern California-based municipal utility natural gas 20-year prepay deals in which AIG has a key role in underpinning more than $1 billion worth of bonds.

The slight improvement in two sets of bonds in muni prepay gas deals reflects the federal government-backed $85 billion borrowing for AIG that was put together last Wednesday, said S&P, while noting that there still is “significant uncertainty related to AIG’s ability to attract and retain business and which [of its] businesses will be sold to repay borrowings under the new facility.

“AIG holds funds needed to meet semiannual principal and interest payments in an account that could be subject to an automatic stay under the bankruptcy code if AIG seeks protection under Chapter 11.”

Earlier in September S&P put three of the deals on CreditWatch with “developing implications,” and Moody’s Investors Service last Tuesday downgraded to “A2” from “A1” more than $500 million in revenue bonds used for pre-paid long-term gas supplies for a group of Southern California public power providers that are members of the Southern California Public Power Authority (SCPPA).

Moody’s said the rating action follows its recent downgrade of global insurance giant AIG to “A2” (on watch for downgrade) from “Aa3.” Goldman Sachs & Co., “Aa3,” is the gas purchase contract guarantor, and AIG is the commodity swap guarantor in the SCPPA deal financing long-term gas purchases for five of its muni members (the cities of Anaheim, Burbank, Colton, Glendale and Pasadena).

On Thursday S&P said SCPPA’s $504 million in gas project revenue bonds was revised to a CreditWatch with a “developing” designation rather than “negative.” It did the same for $635.7 million in senior secured revenue bonds that the City of Long Beach Bond Finance Authority issued to fund a prepay gas deal for the Long Beach municipal gas utility.

Long Beach’s finance authority is the city’s vehicle for financing a 30-year pre-pay supply deal that is supposed to satisfy 80-90% of the city-run utility’s 12-13 Bcf annual gas demand with terms that were designed to keep its retail rates below the surrounding Sempra Energy utilities for the next three decades.

SCPPA’s rating on the pre-pay is tied to its gas supplier, J. Aron & Co., and Goldman Sachs Group Inc. is guaranteeing that supplier’s obligation, as it did with the Long Beach deal.

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