After a significant downgrading of Pacific Gas & Electric and Southern California Edison's corporate bond ratings to junk status resulting from payment defaults, market observers were made aware of the potential impact these problems could have on the capital markets.

SoCal Edison's bond rating was downgraded to D, for default by Standard & Poor's Corporate Ratings Group, after refusing to pay $596 million in debt obligations, while PG&E was downgraded to CC on Credit Watch Negative (ASR, 1/22/01).

With that, exposure to the California utilities' problems could be seen in everything from commercial paper pools to bond insurers:

*Moody's Investors Service downgraded four tranches of notes issued in the Bistro trust (Broad Index Structured Trust Offering). The tranches, from 1997 and 1998 transactions and worth about $1.5 billion, were affected. Triple-A rated bonds totaling $460 million were downgraded to Aa1, while $230 million in subordinates were downgraded to B3 from Ba3.

*Last week, Ace Ltd. (ACL) in Hamilton, Bermuda said that its Ace Guaranty Re unit has about $125 million in exposure through credit default swaps on SoCal Edison and PG&E.

*Fitch recently reevaluated two government pools with exposure to PG&E and it's parent, PG&E Corp. Texas Logic, which contained about $20 million in PG&E commercial paper, was split into two classes. Class B contained only PG&E paper, while Class A contained everything else, according to Steve Lee, an analyst at Fitch. "We withdrew the rating on the original pool and we assigned new ratings to class A, which did not have Pacific Gas & Electric," Lee said.

*Fitch also downgraded Riverside County Investment Pool to AA/V1+ from AAA/V1+. About 2.2%, or $39.7 million, in PG&E Corp. commercial paper was contained in that pool. The pool was supposed to mature Jan. 22, but defaulted, giving the agency reason to downgrade the pool.

*However, Moody's and S&P have reported that no asset-backed commercial paper conduits are currently under review.

*MBIA Insurance Corp. and Ambac Financial Group Inc. also announced potential exposure to California utilities. MBIA reported $445 million in exposure to SoCal Edison and $590 million to PG&E, with most of it secured by mortgage bonds. Ambac has $75.1 million in exposure to SoCal Edison, and $72.67 million to PG&E, both with exposure secured by first mortgage liens on the property the utilities own.

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