By Adam Tempkin (Bloomberg)
Southern California Edison Co. tapped two sets of investors this week for a rare bond backed by fees on customers’ electric bills to help recoup losses caused by wildfire damage. The tactic paid off, allowing the utility to shrink borrowing costs inside of competitors’ issuance of similar debt.
The company, a subsidiary of Rosemead, California-based Edison International, structured the $338 million deal with features of both investment-grade corporate debt and asset- backed securities. That allowed it to market the transaction to funds that invest in both, expanding its buyer base.
The debt offering was the first of its kind for the company in more than two decades and may be part of a series of so- called recovery bonds from California utilities after state lawmakers cleared issuance of the deals. Proceeds from the transactions, which allow companies to borrow against expected future revenue from special charges on customers’ electric bills, may be used to help pay for wildfire damage and efforts to reduce that risk.
SCE is expected to issue more of the debt under a program good for up to $1.6 billion, according to Fitch Ratings, while utility giant PG&E Corp. last year filed a proposal with the California Public Utilities Commission to issue $7.5 billion of similar fire-cost mitigation recovery bonds.
The SCE bond included three notes rated AAA and was oversubscribed several times on each, according to people with knowledge of the transaction. Risk premiums on the 14-year and 20-year notes narrowed by 10 basis points at pricing from guidance, according to data compiled by Bloomberg. Despite considerably longer durations across all tranches, risk premiums on the debt were tighter than similar utility deals from recent years. A 2019 rate reduction bond from AEP Texas Inc., for example, saw its 8-year tranche price with a coupon of 2.29%, while SCE’s 14-year class priced with a much tighter 1.94% coupon.
California’s Assembly Bill 1054 was passed in 2019 to assist in wildfire mitigation efforts in California, allowing for these types of securitizations. A feature called a true-up mechanism was the primary form of credit enhancement in the bond. This refers to the ability to slightly adjust up or down the charges to customers depending on variations in collections, which can sometimes be either too low or too high some months due to population changes or other factors. The true-up balances out and stabilizes payments. The state’s financing order labeled the utilities’ right to impose the recovery charges “irrevocable and unbypassable,” giving investors an extra layer of confidence in uninterrupted cash flow streams.
The transaction’s duration appealed to corporate bond buyers, according to market observers, who were able to get a rare AAA product with ample protections behind it compared to a typical corporate bond in the single-A tier. ABS investors, meanwhile, saw a familiar securitization mechanism built in, and stable cash flows. Also, ABS bonds typically don’t go past five years, so this afforded investors an opportunity to tap duration.
The bond may have appealed slightly more to corporate buyers “since they usually want more duration and are used to buying 10, 20, and 30-year bonds,” said John Kerschner, head of securitized products at Janus Henderson Group.