Spreads Tighten on Utility-Fee Paper

February 15, 2002

Spreads Tighten on Utility-Fee Paper

A heavy flow of paper backed by fees on utility bills has been passing through the hands of secondary-market traders this month — at spreads that are tighter than ever.

Some $750 million to $1 billion of long-term “rate reduction bonds” had changed hands in the secondary market during the first half of February, and a lot more trades are still in the queue. The reason: A recent issue by Dallas utility Central Power & Light, which priced at unusually tight spreads, is acting as a new benchmark for the issues.

Seven-year paper that was trading at 25 bp over swaps on Feb. 1 had narrowed to 16 bp over swaps last week, while 10- year bonds had narrowed 14 bp, to 30 bp over swaps, during the same timeframe, according to Banc One. The higher values have provided investors with an opportunity to take profits. At the same time, the reset pricing allowed them to trade out of long-dated bonds with fixed-rate coupons — a move they had been itching to make because of an expected rise in interest rates. Meanwhile, demand has remained strong enough to absorb the securities streaming into the secondary market.

Outstanding issues are now trading at levels that are comparable to the Jan. 31 pricing on CP&L’s five-tranche deal. For example, CP&L’s five-year class priced at 11 bp over swaps, compared to the prevailing rate of 17 bp to 21 bp on issues from Reliant, PSEG and others.

Those securities are now being sold around 13 bp over swaps. Those spreads compare favorably to outstanding credit card issues, which are usually considered a benchmark for the overall asset-backed market.