$102,700,000 IN DEBT AFFECTED. RATINGS BASED ON SUBSTITUTE LETTERS OF CREDIT PROVIDED BY THE BANK OF NOVA SCOTIA.
Consumers Energy Company
NEW YORK, May 4, 2011 -- Moody's Investors Service has upgraded to Aa1 from Aa2 the long-term ratings of
the Michigan Strategic Fund Variable Rate Limited Obligation Refunding Revenue
Bonds (Consumers Energy Company Project), Series 2008 and Michigan Strategic
Fund Variable Rate Limited Obligation Refunding Revenue Bonds (Consumers Energy
Company Project), Series 2005 (collectively, the Bonds) and affirmed the
short-term VMIG 1 ratings on the Bonds.
SUMMARY RATING RATIONALE
The rating actions are occurring in conjunction with the substitutions of the
irrevocable direct pay letters of credit to be provided by the Bank of Nova
Scotia (the Bank) for the irrevocable direct pay letters of credit provided by
Wells Fargo Bank, N.A. Substitution of the letters of credit will be effective
May 4, 2011.
The ratings are based upon the letters of credit provided by The Bank of Nova
Scotia (the Bank); the structure and legal protections of the transaction, which
ensure timely payment of debt service and purchase price to bondholders; and
Moody's evaluation of the credit quality of the bank providing the letters of
Moody's currently rates the Bank of Nova Scotia's long-term obligations Aa1 and
its short-term obligations Prime-1.
DETAILED CREDIT DISCUSSION
Interest Rate Modes and Payment
The Bonds currently bear interest at the weekly rate mode and pay interest on
the first business day of each month. Each series of the Bonds may be converted,
in whole, to bear interest at a daily, term, flexible, or PARS rate mode. The
Bonds are subject to mandatory tender at a price of par plus accrued interest
upon any such conversion. The rating will cover the Bonds in the daily and
weekly rate modes only. Bonds bearing interest in the daily rate mode will also
pay interest on the first business day of each month. The ratings will cover the
Bonds in the daily and weekly rate modes only.
The indenture does not permit the issuance of additional bonds.
Flow of Funds
The trustee is instructed to draw under the letters of credit for
principal and/or interest on the business day preceding each interest and
principal payment date. The trustee is also instructed to draw under the letters
of credit on each purchase date, for purchase price, to the extent remarketing
proceeds received are insufficient. Bonds which are purchased by the Bank due to
a failed remarketing are held by the trustee and will not be released until the
trustee has received written confirmation from the Bank stating that the
applicable letter of credit has been reinstated in the amount of the purchase
price drawn for such Bonds.
Letters of Credit
The letters of credit are sized for full principal plus 50 days of interest at
the maximum rate applicable to the Bonds (10%) and will provide coverage for the
Bonds while they bear interest in the daily and weekly rate modes only. The
letters of credit provided by the Bank of Nova Scotia is governed by the Uniform
Customs and Practice for Documentary Credits (International Chamber of Commerce
Publication No. 500) (the UCP).
Draws on the Letters of Credit
Conforming principal and interest draft draws received by the Bank by 3:00 p.m.
Eastern time on a business day, will be honored by 10:00 a.m. Eastern time on
the next business day. Conforming purchase price draws received by the Bank by
10:30 a.m. Eastern time on a business day, will be honored by 2:30 p.m. Eastern
time on the same business day.
Reinstatement of Interest Draws
The interest component will be automatically reinstated effective at the open of
business on the eighth (8th) business day after the Bank's honoring of such
draw, unless the trustee receives notice from the Bank by the close of business
on the seventh (7th) business day following the date on which the draft is
honored that such amount is not so reinstated. Upon receipt of notice, the
Trustee shall immediately declare the Bonds due and payable and draw on the
letter of credit. Interest ceases to accrue upon the payment date, which shall
be within four (4) calendar days of receipt of notice from the Bank that the
interest component of the letter of credit is not reinstating.
Reimbursement Agreement Defaults
The Bank may send written notice to the Trustee stating that an event of default
under the reimbursement agreement has occurred and directing acceleration. The
Trustee shall immediately declare the Bonds due and payable. Interest will cease
to accrue upon the payment date of the Bonds (which must occur within four days
of declaration of acceleration). The letters of credit expires upon the Bank's
honoring of an acceleration drawing.
Expiration/Termination of the Letters of Credit
Each letter of credit terminates upon the earliest to occur of: (i) May 4, 2013,
the stated expiration date of the letter of credit, (ii) the date on which the
Bank honors a drawing for payment at stated maturity, acceleration following an
event of default, or upon redemption of all the Bonds, (iii) fifteen (15) days
following conversion of the interest rate on the Bonds to the PARS mode,
and (iv) the date on which (a) no Bonds remain outstanding, (b) all draws have
been honored, or (c) a substitute letter of credit has been issued.
The Bonds will be subject to mandatory tender no later than two business days
prior to the effective date of an alternate letter of credit.
Bondholders may optionally tender their Bonds during the weekly rate mode on any
business day with seven days prior written notice to the paying agent.
Bondholders may also optionally tender their Bonds during the daily rate mode on
any business day with written notice delivered to the paying agent by 10:00 a.m.
New York, NY time on the purchase date.
Each series of the Bonds is subject to mandatory tender as follows: (i) on any
interest rate conversion date, (ii) no later than two (2) business days prior to
each credit facility substitution date, and (iii) no later than two (2) business
days prior to the date on which the credit facility expiration date is to occur.
Each series of the Bonds is subject to mandatory redemption upon a
determination of taxability.
WHAT COULD MAKE THE RATINGS GO UP
An upward revision of Moody's long-term rating of the Bank of Nova Scotia would
result in an upward revision of the long-term ratings of the Bonds.
WHAT COULD MAKE THE RATINGS GO DOWN
A downward revision of Moody's long-term rating of the Bank of Nova Scotia would
result in a downward revision of the long-term ratings of the Bonds. A downward
revision of Moody's short-term rating of the Bank of Nova Scotia would result in
a downward revision of the short-term ratings of the Bonds.
Series 2005 - Bank of New York Mellon
Series 2008 - Deutsche Bank National Trust Company
Series 2005 - Goldman Sachs & Co.
Series 2008 - Key Bank Capital Markets
PRINCIPAL METHODOLOGY USED
The principal methodology used in rating this issue was Moody's
Rating Methodology for Rating U.S. Public Finance Transactions Based on the
Credit Substitution Approach, published in August 2009.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings and public information
Moody's Investors Service considers the quality of information available on the
issuer or obligation satisfactory for the purposes of assigning a credit rating.
Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.
Public Finance Group
Moody's Investors Service
Senior Credit Officer
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S UPGRADES TO Aa1 FROM Aa2 THE LONG-TERM LETTER OF CREDIT BACKED RATINGS TO THE MICHIGAN STRATEGIC FUND VARIABLE RATE LIMITED OBLIGATION REFUNDING REVENUE BONDS (CONSUMERS ENERGY CO.), SERIES 2005 AND 2008 ; AFFIRMS SHORT-TERM VMIG 1 RATINGS
Moody's Investors Service
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