Moody's MSW Energy notes Ba2

Moody's Investors Service has assigned a Ba2 rating to MSW Energy Holdings II LLC's and MSW Energy Finance Co. II Inc.'s new $225 million issuance of senior secured notes due 2010. The rating outlook is stable.

The Ba2 rating reflects the higher level of debt being incurred to finance the purchase of the remaining 50% of Ref-fuel Holdings LLC from United American Energy Holdings Corp. when compared to the $200 million of debt issued earlier this year to finance the purchase of the first 50% of Ref-fuel Holdings LLC by MSW Energy Holdings LLC from Duke Energy Corp.

The rating also reflects deep structural subordination of the notes to about $1.2 billion of debt at the subsidiary waste-to-energy projects and at the intermediate holding company, American Ref-Fuel LLC.

Distributions to MSW Energy Holdings II require the maintenance of a backward and forward looking rolling four-quarter debt service coverage ratio of 1.75x at ARC, which could trap cash at the American Ref-fuel level if the financial performance of the projects deteriorates. The agency also noted there is no interest reserve fund, limiting financial flexibility, and there is a bullet maturity in 2010, which entails refinancing risk.

Moody's also noted the relatively stable cash flows generated by the underlying waste-to-energy projects.

American Ref-Fuel maintains reasonable liquidity, having recently put in place a three-year $75 million revolving credit facility, which will be used for letter of credit and working capital purposes.

The stable outlook reflects Moody's expectation that: (i) the waste-to-energy projects' contracts with the respective municipalities and utilities will remain in place through their current maturities; (ii) American Ref-fuel management will continue to aggressively market excess capacity; and (iii) American Ref-fuel will de-lever over the next several years at the subsidiary project level.

However, the notes rating could be raised or lowered if dividends distributable from American Ref-fuel differ from expected levels or if the company acquires additional waste-to-energy projects or was subject to unforeseen capital expenditure requirements at the existing projects, particularly with regard to environmental regulatory compliance.

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