Sept. 26 (Bloomberg) -- Tax-exempt bonds guaranteed by Lehman Brothers Holdings Inc. for a gas-supply contract may be worth little more than unsecured debt after the bankrupt underwriter's commodity unit stopped deliveries last week.

Main Street Natural Gas, a financing vehicle of the Municipal Gas Authority of Georgia, terminated the contract funded by $709 million in bonds sold five months ago, after Lehman's subsidiary failed to deliver gas for five days beginning Sept. 18. New York-based Lehman, which filed for bankruptcy on Sept. 15, owes a termination payment that would provide enough money to redeem the bonds Sept. 30.

``We don't expect payment due to the bankruptcy, so the bondholders will likely join unsecured creditors in bankruptcy court,'' said Susan Reeves, chief financial officer of the Kennesaw, Georgia-based authority, which provides gas for municipalities from Florida to Pennsylvania. ``We don't believe any other avenue is likely at this point.''

The utilities that received gas from the deal, including Tallahassee, Florida, lose the savings from market price that the tax-exempt financing created for them. The default may also damp issuance of similar bonds through which local entities lock in long-term energy supplies at a discount through deals backed by financial firms, according to Merrill Lynch & Co.

``The first prospective and actual bond defaults within a discrete class of municipal bonds will raise questions over the integrity of the security structure going forward,'' said Phil Fischer, municipal strategist at Merrill in New York, in a Sept. 22 report. ``There is a burgeoning pipeline of projected transactions for municipally owned natural gas and electric utilities that may be adversely affected.''

Trading Lower

Nine-year Main Street Natural Gas bonds with a 5.5 percent interest rate traded as low as 15 cents on the dollar today, down from 96 cents as recently as Sept. 15, Lehman's bankruptcy day, according to trades reported to the Municipal Securities Rulemaking Board.

All three major rating companies cut the bonds' rating to speculative grade after Lehman's filing. They are rated B3 by Moody's Investors Service, C by Fitch Ratings and D by Standard & Poor's, according to data compiled by Bloomberg.

Given the Chapter 11 action, ``we believe the funding of the early termination payment'' by the parent company or the commodity unit is ``unlikely,'' S&P said Sept. 23.

Lehman bondholders may get anywhere from zero to 29 cents on the dollar, according to Peter Plaut, an analyst at Imperial Capital LLC, who said the bank's senior unsecured bonds may be a ``buy'' at 15 cents. Lehman, once the fourth-biggest U.S. securities firm, is selling assets to pay creditors as part of its liquidation in U.S. bankruptcy court in Manhattan.

To contact the reporter on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net.

Last Updated: September 26, 2008 10:46 EDT