MOODY'S REVIEWS SECURITIES ASSOCIATED WITH NUCLEAR SALE LEASEBACK TRANSACTIONS FOR POSSIBLE DOWNGRADE
New York, 2/6/1995 -- Moody's Investors Service placed the ratings of secured lease obligation bonds (SLOBs), lease obligation bonds (LOBs), and preferred stock of certain utilities under review for possible downgrade. Specifically under review are the securities ratings of SLOBs and LOBs issued by special purpose corporations to finance the sale and leaseback of nuclear generating facilities, and the preferred stock ratings of the utilities involved in those transactions. This review does not include SLOBs and LOBs supported by non-nuclear assets. The review was prompted by the agency's concern that the asset value of nuclear generating plants pledged as collateral in these transactions is being impaired by the ongoing transition to a competitive power market.
Securities under review will include:
* PVNGS II Funding Corp. SLOBs, rated Baa3 (Arizona Public Service Co. - lessee)
* Arizona Public Service Co. preferred stock, rated "baa3"
* CTC Beaver Valley Funding Corp. and Beaver Valley II Corp. SLOBs, rated B1 (Cleveland Electric and Toledo Edison - lessees)
* Cleveland Electric Illuminating Co. and Toledo Edison Co. preferred stock, rated "b2"
* DQU II Funding Corp. SLOBs, rated Baa2 (Duquesne Light Co. - lessee)
* Duquesne Light Co. preferred stock, rated "baa1"
* Louisiana Power & Light Co. SLOBs, rated Baa3, and preferred stock, rated "baa3"
* BVPS II Funding Corp., PNPP Funding Corp., and PNPP II Funding Corp. SLOBs, rated Baa3 (Ohio Edison - lessee)
* Ohio Edison Co. preferred stock, rated "baa2"
* First PV Funding Corp. LOBs, rated Ba3 (Public Service Company of New Mexico - lessee)
* Public Service Company of New Mexico preferred stock, rated "b1"
* GG1B Funding Corp. SLOBs, rated Baa3 (Systems Energy Resources Inc.- lessee)
The securities issued in connection with the bankrupt El Paso Electric Company's sale and leaseback transaction are not included in this review as Moody's believes the current Ca rating for Delnorte Funding Corp. SLOBs and El Paso Funding Corp. LOBs, and the "ca" preferred stock rating of El Paso Electric Company fully incorporate the companies' credit risk, even under the adverse scenarios that will be analyzed in this review.
In its review, Moody's will focus on the impact of growing competition in the electric utility industry on the collateral value of nuclear plants. Additionally, Moody's will examine off-balance-sheet obligations and their effect on the claim of preferred shareholders. The review will follow closely the issues raised in the July 1993 special comment, "Moody's Reaffirms its Rating Approach to Lease Obligation Bonds and Secured Lease Obligation Bonds." At the time of that report, Moody's indicated that it may adjust credit ratings to reflect the additional risks accruing to investors as a result of declining market values of plants pledged to SLOB holders.
Moody's ratings of LOB and SLOB obligations incorporate the risk that in a bankruptcy proceeding the leases could be deemed leases of "real property", in which case the SLOB and LOB holders' claims against the lessees may be severely limited. In such a case, the collateral value of the pledged asset becomes paramount in assessing the risk of non-recovery to the SLOB and LOB holders. Historically, Moody's believed collateral values were likely to be adequate to provide for shortfalls in the event of a default. However, growing competition in the electric utility industry may result in market values for these plants that are lower than the values assumed in these financings.
In any liquidation scenario, the claims of preferred shareholders will be in an inferior position to the claims of LOB and SLOB holders. If a court were to rule the leases to be "personal property", LOB and SLOB holders would attempt to satisfy their claim by moving against the collateral and then would attempt to recover any residual from the lessee. If the court were to determine the leases to be real property, the claim of SLOB and LOB holders against the lessee would be severely limited. Preferred shareholders could be in a stronger position for recovery of their investment under the "real property" scenario, since LOB and SLOB holder claims would be limited and more of the estate would be available for preferred equity holders.
In its review, Moody's will focus on the likelihood a bankruptcy court would rule the leases as "personal property" or "real property" and the resultant effect on preferred shareholders' recovery; and on the market value of nuclear assets in a more competitive power market in relation to the outstanding amount of SLOB and LOB obligations.
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