STRUCTURED WEEKLY:

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.

Ample Protection

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.

See https://www.bloomberg.com/news/articles/2021-02-19/structured-weekly-investors-leap-on-rare-utility-recovery-bond