Monday, October 13, 2014

Municipal Natural Gas Prepayment Deals

The second largest holding in the NAZ muni ETF is Citigroup Energy I: Salt Verde Prepay. Here's an article from 2008 about municipal natural gas prepayment deals:

A gas prepayment is a contract under which an agreed amount of discounted gas is supplied over a period that can range from 10-30 years. Crucially, the main difference between a typical commercial prepayment transaction and one involving a municipal utility or public agency is that the latter purchase is financed through the issuance of tax-exempt bonds.

"A public agency can issue such bonds and then use the proceeds to prepay for a specified, predetermined stream of natural gas," says Troy Black, managing director of financial products at BP in Houston. "The municipality passes the proceeds of the bond issuance by virtue of prepayment to a prepay supplier, which then has the obligation to deliver a steady stream of gas."
The article has a hilarious quote: "The market interest rate spreads are not currently conducive to meeting some of the economics that people became accustomed to by the middle of 2007"


Nathan said...

Looking at the discounts on Nuveen muni CEFs I wonder if they'll ever have another IPO.

The NAV of NKX, a Nuveen CA fund, is back near its high in 2012 but the discount has widened to >12%. The ownership listings show a few speculative owners like RNSIX, but those stakes are relatively small.

While I'm not optimistic about California's long-term prospects, I'm also surprised that there aren't more buyers of these funds with ~10% tax-equivalent yields.

CP said...

They are all trading at huge discounts, aren't they.

Retail is so scared of rising rates that they don't want to own these anymore.

CP said...

Nathan, sorry to miss this comment in 2014.

Have you read what we've written recently about pipeline/midstream CEFs?

It seems like whatever asset class has CEF's trading at a discount to NAV is a buy. (And buying it by way of the CEF is not a bad idea.)

See also Convexity Maven's thought on this:
The AMLP listed ETF is a collection of the larger fossil fuel MLPs that have not converted to a C-Corp profile. Notwithstanding its disadvantageous tax structure, its current yield of nearly 10%, or about 825bps wide to the T10yr, can only be explained as either a stupendous tax-loss motivated liquidation, or the realization that MLPs are a feat of financial engineering that is inherently flawed. Fossil fuels will not be eliminated in the near future, and their transportation from the ground to the gas tank is a necessary function that at some point must be a profitable venture. It is my fervent hope that MLPs are not the subject matter for Betheny McLean’s next best seller. A 10% dividend for a listed 20-stock Index is the wrong number; either AMLP will rise in price, or the 19.5 cent dividend will be reduced to 14 cents. I suppose it is possible that the underlying MLPs are functionally a $200bn Ponzi scheme that relied upon rising oil prices to maintain the illusion of profitability; but I suspect the answer is a bit more banal. What we likely have here is a mismatch in capital where Retail investors have tossed in the towel and Institutional investors can't or won't buy a (K-1) partnership structure.

CP said...

NB MLP and Energy Income Fund Inc. NML

18% discount to NAV

10.5% distribution yield