Columbia Gas Systems Inc., after weeks of haggling with lenders, made good on its threat of bankruptcy yesterday, whispsawing the utility's junk bonds.

The Delaware-based gas utility said it was unable to re-establish a $1.2 billion credit line with its bank group, led by Morgan Guaranty Trust Co., after defaulting on $873.5 million of commercial paper and short-term note payments.

Columbia, a leading supplier of natural gas to utilities in the Northeast, stunned Wall Street in June with news that it faced as much as $1 billion of losses on take-or-pay contracts with its natural gas suppliers.

The bankruptcy filing, regarded by some Wall Streeters as a negotiating ploy to help settle the disputed gas purchase contracts, sent Columbia's junk bonds on a roller-coaster ride and prompted steep downgrades from major bond raters.

Columbia Gas's 10.50% debentures of 2012 initially plunged seven points on the news, to 73, only to rebound more than five points, to 78 1/2. Traders said few of the bonds, which are trading flat, or without accrued interest, actually changed hands. But bonds often to rise immediately after a company files for bankruptcy as investors jockey to pick up the securities at bargain prices.

Fitch Investors Service, Moody's Investors Service, and Standard & Poor's Corp. all sharply downgraded Columbia's debt on the news.

Standard & Poor's cut Columbia 11 notches, to D from BB, affecting about $2.2 billion of outstanding debt. Moody's, meanwhile, cut Columbia's senior debt to Caa from B1, while Fitch dropped Columbia to DDD from BB.

Ralph Peelecchia, who follows Columbia for Fitch, said the Chapter 11 filing was not unexpected.

"We anticipated the negotiations would be difficult," Mr. Pellecchia said. But "we have a DDD rating on the bonds, representing the highest potential for recovery" in the default category. Fitch rates defaulted bonds from DDD, representing the highest possibility for recovery, to D, representing the lowest.

Before the Columbia announced the $1 billion liability on its take-or-pay contracts on June 20, all of the major agencies rated the credit investment-grade.

All three said yesterday's filing will likely ease the way for debtor-in-possession financing and further negotiations with Columbia's gas suppliers.

Columbia has offered about $600 million to settle the more than $1 billion worth of contracts for gas at prices above the spot market. The contracts are signed with Columbia Gas's pipeline subsidiary, Columbia Gas Transmission Co.

Columbia Gas Systems Chairman John Croom yesterday said the filing may give the company more leverage in negotiations with bank lenders and gas suppliers. But he insisted that that was not Columbia's purpose for filing under Chapter 11.

Richard S. Barnett, industrial analyst at Mabon Securities, agreed the filing was not a great surprise, but conceded that until Tuesday he had given Columbia a fifty-fifty chance.

"The question was whether they could renegotiate their bank loans," Mr. Barnett said. "Apparently they haven't been able to."

Mr. Barnett said he expects the bankruptcy to last at least one year and that the bonds are likely to continue to trade down as the Chapter 11 progresses.

"The bondholders will not be getting coupons, so if you're depending on them for cash flow, you've got a problem," he said.

Most investment-grade corporate bonds advanced 1/8 point in light trading yesterday, while junk issues finished little changed.

Among the modest $300 million slate of new corporate and agency issues. American General Finance Corp., a unit of American General Corp., offered $100 million of four-year notes.

Working through a team led by Merrill Lynch Capital Markets, the company offered the noncallable securities as 8.10s to yield 72 basis points more than the interpolated three- and five-year Treasuries.

Standard & Poor's rates the issue A-plus; Moody's ratesit A1.

The burgeoning asset-backed securities market, already reportedly raising eyebrows at the Securities Exchange Commission, is now apparently raising concern at the Federal Reserve, as well.

Franklin Dreyer, soon to be vice president of the Federal Reserve Bank of Chicago, told Congress yesterday the market's growing complexity "makes it potentially more difficult to determine where the risk is and who has it."

In testimony prepared for delivery to a House banking subcommittee, Mr. Dreyer said, "The complexity of risks in this securitization process, coupled with the increasing pace of innovation, could make it difficult for banking organizations to liquidate some types of securities.

"More, increasingly complex ... guarantee arrangements can make it more difficult to monitor the risks associated with this activity," he said, adding," Adverse risk selection can weaken the credit underpinnings of the securitization process."

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