TXU Hammers Out Securitization Plan

March 1, 2002

TXU Hammers Out Securitization Plan

Details are slowly emerging about TXU Electric’s plan to securitize special charges that are tacked on consumer’s electric bills.

The Dallas utility intends to sell $500 million of asset-backed bonds this year and another $800 million of securities in 2004. But first it hopes to clear up many of the disputes surrounding its plan at a March 12 hearing with the Texas Public Utility Commission.

Among the matters to be discussed is the amount of issuance that TXU is allowed to conduct. As it now stands, the utility has approval to issue just $345 million of bonds, a figure it has protested. TXU’s offerings have been repeatedly delayed, and modified, due to various challenges to the plan. The commission intends to use the hearing to clear up whether the challenges are valid, and give other parties a chance to raise objections. If there aren’t any strong protests, the commission will probably allow TXU to move forward. “If they get through the hearing, they will have smooth sailing. If they don’t, the deals could be delayed again,” said one industry insider.

In either case, it appears that the commission will attempt to hand down a ruling by the end of the month. In the meantime, it has become increasingly likely that TXU’s offerings will resemble a $797 million issue that Central Power and Light of Dallas completed on Jan. 31 — at unusually tight spreads. For that deal, the public utility commission’s advisor, Saber Partners, included a structural twist that awarded special fees to the co-managers who brought in the best pricing. An investor at State Street Bank said Saber’s oversight of all phases of the issue made it a better bet for buysiders as well.

In its role as advisor to the commission, Saber is responsible for ensuring that planned rate-reduction issues provide the lowest possible costs of funds, while jointly making decisions on the structuring, marketing and pricing of those securities. The New York advisory boutique was set up in 2000 by a group of utility-industry pros that includes former Bear Stearns banker Joseph Fichera.

For CP&L’s deal, Bear Stearns and Merrill Lynch pocketed a large portion of the incentive, which was equal to about $1 million, or 25% of the total underwriting fees. Credit Suisse First Boston and Salomon Smith Barney were also co-managers, while Goldman Sachs acted as bookrunner. That’s a smaller field of managers than the 10 or so that have managed past “rate-reduction” issues.

The group of underwriters for TXU’s first issue could be even smaller. Bear and Merrill are considered strong contenders for the available slots.

Meanwhile, TXU appears to be leaning toward hiring Morgan Stanley as the bookrunner for its deal — a decision that would require the go-ahead from Saber and the commission, which will probably want to meet with bank officials before the selection is made. Saber would separately have to approve underwriters for each of TXU’s planned transactions.

It’s possible that when TXU’s first deal comes to market, it will command even tighter spreads than CP&L’s transaction. CP&L sold its securities to about 55 investors — about twice as many as is typical for such a transaction. Saber is pushing to target an even broader field of investors for TXU’s deal, including “crossover” buyers that normally focus on unsecured corporate bonds.

At the same time, mainstream asset-backed investors are becoming more comfortable with utility-fee transactions, thanks to the strong performance of the deals’ collateral. They’re also becoming more eager to snatch up the bonds because they’re among the few long-term securitized products involving consumer-related receivables other than cred-it cards and auto loans.

For those reasons, TXU could have an easier time convincing the utility commission that its planned securitizations would benefit consumers.