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March 25, 2005

Saber Gets Cold Shoulder From Underwriters

Some underwriters of utility-fee securitizations are vowing not to pursue underwriting assignments in states advised by Saber Partners, claiming that the unusual fee structure used for those deals is too burdensome.

Citigroup, Morgan Stanley and Wachovia are among the banks that refuse to work with Saber, a New York boutique that represents public utility commissions in states where power companies securitize special fees tacked onto customers’ electricity bills.

The friction results from a performance-based compensation system that Saber’s utility-commission clients employ for underwriters. Rather than going with a typical arrangement in which a manager is assigned a pool of bonds ahead of time and then collects a proportional amount of fees, Saber rewards banks for achieving the lowest possible pricing and bringing in non-traditional investors. The idea is to ensure that issuers, and therefore the consumers whose payments back the bonds, get the lowest possible funding costs – and it has certainly worked in the past.

But some underwriters see the arrangement as a raw deal, especially for the bookrunners. Banks acting as bookrunners typically pocket the lion’s share of the underwriting fees from their offerings, no matter how well they execute the issues. Saber, on the other hand, only guarantees bookrunners 10-20% of those charges and leaves the rest up for grabs for the entire underwriting syndicate.

While that gives co-managers the opportunity to become big earners, it might not compensate bookrunners fairly for their structuring work, the complaint goes. What’s more, the hassle of expanding marketing efforts into the corporatebond and foreign markets may not justify the potential rewards – especially when banks can lock in near-guaranteed fees by dedicating staff to other types of deals.

“We pass on the opportunity to work on further deals with Saber,” one banker said. The way Saber chief executive Joe Fichera deals with bankers and his price-management methods “drain the time of the syndicate and do not justify our involvement,” the banker added.

On average, a $1 billion utility-fee securitization generates about $5 million of underwriting commissions.

Certain banks are also concerned about a recent move by Saber to install “certification of costs” provisions in securitization orders from the utility commissions. The provisions force underwriters to promise the lowest funding costs consistent with market conditions – a requirement that they fear is too subjective and could expose them to lawsuits.

Saber insisted on a certification of costs for a $125 million issue from Public Service Enterprise Group in New Jersey and a $500 million offering from Wisconsin Electric Power, both of which are slated to hit the market this year. The provision will also be included in a $2 billion issue from Centerpoint Energy, although it’s unclear if Saber is involved.

Citi isn’t interested in competing for the Wisconsin Electric mandate unless the clause is removed. The bank was apparently successful in extracting a similar provision last week from a pending law in Florida that would authorize Florida Power & Light and Progress Energy to issue assetbacked bonds. Citi is advising both companies.

As for Morgan Stanley and Wachovia, Fichera contends the banks are sore because they didn’t bring in enough investors for past deals in Texas – where Saber advised the Public Utility Commission of Texas – and therefore received reduced fees. Wachovia, for example, was a co-bookrunner on one deal, but only took home 27% of the fees. “The problem is the banks want to be paid guaranteed fees whether or not they have worked hard,” he said.

Fichera also maintains that Morgan Stanley is bitter because the Public Utility Commission of Texas elevated Lehman Brothers to a co-bookrunner role on another transaction, after Morgan Stanley structured the issue under its original designation as sole bookrunner. The commission apparently made the move because Lehman was more successful in its marketing efforts.

Saber still has plenty of banks vying to underwrite the New Jersey and Wisconsin deals. Barclays Capital, Goldman Sachs, RBS Greenwich Capital and Lehman, for example, are among the banks competing for the Wisconsin Electric assignment. Credit Suisse just won the PSEG mandate.

Goldman raked in 65% of the fees from one of the Texas issues.

Fichera’s claim that his arrangements work in the best interests of clients appears well founded. The four deals he helped arrange in Texas priced tighter than any previous utility-fee securitizations – sometimes tighter than top-tier credit-card securities.

Steven G. Kihm, an economist at the Public Service Commission of Wisconsin, said in a December report that the pricing of the Texas transactions indicates that Saber’s requirements will likely save ratepayers $750,000 to $1 million per year over the 10-year life of Wisconsin Electric’s issue.

Asset-Backed Alert (ISSN: 1520-3700), Copyright 2005, is published weekly by Harrison Scott Publications Inc.


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