Investors Flock to Stranded Cost ABS
August 2, 1999
Although building a consensus on Wall Street is usually near impossible, Boston Edison's $725 million stranded cost securitization is being called a highly successful offering that could set the stage for a larger transaction from another public utility, PP&L Resources Inc.
What remains unanswered, however, is whether or not triple-A rated utility deals should sell at spreads tighter than credit card offerings.
Analysts argue that with longer average lives and some scarcity value, the stranded cost issues should warrant tighter spreads.
One ABS specialist close to the Boston Ed deal said the conventional wisdom is that if consumers will pay their utility bills before they send the check to the credit card company, why aren't spreads tighter?
The answer, according to some trading sources, is an ongoing concern that the public is still not fully buying into the rate reduction argument, especially when the utilities can pass along "transition charges" to consumers.
A syndicate source said California's Proposition 9, which was on the ballot last year seeking to overturn the state's utility deregulation, is still a source of apprehension even though voters rejected the measure.
Boston Edison's deal was widely sought after by investors across the entire buy-side spectrum, sources said. It was also seen as setting the stage for the equally sought after, but much larger, $2.6 billion rate reduction bond offering from PP&L.
A person familiar with the PP&L deal noted that while there is no legislative risk in Pennsylvania there is some prevailing concern about possible judicial risk since many judges do not understand the securitization market and therefore there exists a threat of lengthy legal battles in many venues.
However, a source close to the Boston Edison issue believes that technical supply considerations are one of the key factors in the current pricing climate for the stranded cost issues.
The asset-backed securities market has experienced some of its heaviest new issue flows in recent weeks. While the buyside first appeared to have the appetite for the feeding frenzy, the sector now has a slight case of indigestion, according to traders, and this has brought in prices and widened spreads.
Adding to the pressure was the disarray in the credit markets that followed the first leg of Federal Reserve Chairman Alan Greenspan's Humphrey-Hawkins testimony to Congress. Greenspan's comments led to a sharp selloff and a quick ratcheting upward of interest rates, which flowed from the bellwether Treasury market across the spectrum.
Although the selloff has slowed the new issue flow somewhat, market sources believe PP&L will have to price at a bit of a concession even though there is very strong investor interest.
Nevertheless, one analyst said there is added attraction in the fact the PP&L bonds will become part of the Lehman Index, a widely followed fixed-income benchmark fixed-income money managers aim to beat.
This is adding appeal for the issue and should enable members of the large syndicate to be a bit more aggressive in pricing, sources said. - David Feldheim