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Brooklyn Navy Yard Cogeneration Partners L.P. Tax-Exempt Bond Ratings Raised To 'AA-' On Anticipated Defeasance

  • On July 24, 2018, AxInfra acquired 100% of the ownership of Brooklyn Navy Yard Cogeneration Partners L.P. (BNYCP) from Ares EIF US Power Fund IV (Ares EIF). AxInfra will refinance all of the project's rated senior debt outstanding, with financial close expected on Feb. 14, 2019.
  • BNYCP will defease, and on Feb. 18, 2019, fully redeem all of the rated tax-exempt debt issues except for the $31,960,000 6.2% series A tax-exempt term bonds due Oct. 1, 2022, which will be defeased through maturity.
  • As a result of the proposed defeasance, we raised the ratings on all of the rated tax-exempt debt to 'AA-' from 'B+'. This reflects the rating on the escrow agent given that the agent can hold the collateral as cash and there is no replacement covenant on the escrow agent.
SAN FRANCISCO (S&P Global Ratings) Feb. 13, 2019—S&P Global Ratings today took 
the rating actions listed above.

BNYCP owns the Brooklyn Navy Yard Cogeneration Facility, a 286 megawatt (MW) 
gas- and oil-fired cogeneration facility located in the Brooklyn Navy Yard in 
Brooklyn, N.Y., which can produce up to 1 million pounds of steam per hour. 
The plant began operations in November 1996. It receives stable revenue from a 
power purchase agreement to provide low-cost electricity and steam to 
Consolidated Edison Co. of New York Inc. (Con Edison).

The rating action reflects our opinion of the anticipated defeasance of all of 
the $307 million tax-exempt  bonds from a refinancing.  

On July 24, 2018, AxInfra acquired 100% of the ownership of BNYCP from Ares 
EIF. BNYCP will pay off all of the project's rated senior debt outstanding. A 
hybrid financing has been arranged and commitments and underwriting approval 
have been obtained, with financial close expected on Feb. 14, 2019.

The project will use a combination of tax-exempt bonds, taxable notes, and 
funds held under accounts created by the 1997 tax-exempt indenture to fund the 
defeasance and redemption of the $110,280,000 5.65% series B tax-exempt term 
bonds due Oct. 1, 2028 (series B term bonds)and the $164,760,000 5.75% 
tax-exempt term bonds due Oct. 1, 2036 (series C term bonds). The funds will 
be deposited with the escrow agent on Feb. 14 and then redeemed four days 
later, a result of a delay in sending out the redemption notice. The project 
will also use proceeds from the taxable notes and the tax-exempt indenture 
accounts to defease the series A term bonds through maturity, as these bonds 
are not callable.

We have reviewed the proposed cash flows--accompanied by a verification 
opinion from a certified public accounting firm--indicating that amounts 
deposited into the escrow fund plus interest earnings will be sufficient, 
without need for reinvestment, to pay all interest and principal on the bonds 
when due. For the series A term bonds, the escrow agent will immediately 
invest the escrow funds in already identified state and local government 
series (SLUGS) securities. SLUGS are U.S. Treasury obligations, and have a 
credit quality equal to that of the U.S. ('AA+').

However, the ratings on the defeased bonds are capped by the credit quality of 
the escrow agent, The Bank of New York Mellon (AA-/Stable/A-1+), because, in 
the case of the series B and C term bonds the collateral is cash, and in the 
case of the series A term bonds the escrow agreement allows the escrow agent 
to sell the securities and hold the proceeds as cash in addition to 
reinvesting in SLUGS. In addition, there is no replacement covenant on the 
escrow agent. Thus, the ratings on all the defeased bonds are 'AA-'.

We expect the issuer to request that we withdraw the rating on all of the 
defeased bonds after the transaction is completed, as there is no ongoing 
rating requirement on the defeased bonds.

The taxable notes will also be used to fund the redemption of the $100,000,000 
7.42% senior secured bonds due Oct. 1, 2020. The redemption is expected to be 
funded on Feb. 14, 2019, after which we will withdraw the rating on the bonds.

The stable outlook reflects the outlook on the escrow agent, as the ratings on 
the defeased bonds can be no higher than the rating on the escrow agent. There 
are currently two notches between the rating on the underlying collateral 
(U.S. Treasury obligations) and the rating on The Bank of New York Mellon. 
Nevertheless, after the refinancing, which is expected to close on Feb. 14, 
the rating will be withdrawn.

We would lower the rating in lockstep with a lower rating on the escrow agent. 
We could also lower the rating if the rating on the U.S. falls below that on 
the escrow agent.

We could raise the rating if the rating on the escrow agent is raised, up to 
the point that the rating is the same as that on the U.S.

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