In the News: Recent Developments

July 21, 2003

RRB sector leader Texas aims to set best practices

CenterPoint plans largest-ever stranded cost ABS

CenterPoint Energy, which hopes to bring the largest ever stranded cost offering next year, has taken steps,at the request of regulators to increase transparency in its deals, hopefully leading to a sector-wide trend. Interestingly, several past issuers have de-registered, or suspended filings, on their outstanding transactions. Using programmatic ABS issuers such as Sallie Mae as a benchmark, CenterPoint voluntarily committed to expand the data reported in quarterly filings and begin reporting additional performance and collections data on its Web site, sources said.

The move comes as CenterPoint is in the planning stages of a $4 billion to $6 billion offering via Morgan Stanley and the Public Utility Commission of Texas (PUCT). The commission aims to differentiate the state as the most investor-friendly in the stranded asset universe. The state also claims it will ensure the lowest electricity rates to electricity consumers.

No filing – no explanation
Issue State Pricing Filing Date Filed
PSNH Funding 2001-1 NH Apr-01 8-K 5/7/01
PSNH Funding 2002-1 NH Jan-02 8-K 2/7/02
WMECO Funding 2001-1 MA May-01 8-K 5/24/01

Deregistered under Rule 15-15D

Issue State Pricing Filing Date Filed
ConEd Funding LLC IL Dec-98 15-15D 5/13/99
Illinois Power 1998-1 IL Dec-98 15-15D 5/17/99
BEC Funding 1999-1 MA Jul-99 15-15D 5/8/00
Peco Energy 2000-A PA Apr-00 15-15D 1/29/02
CPL Tran. Funding 2002-1 TX Jan-02 15-15D 1/22/03

Source: Securities and Exchange Commission

Together, CenterPoint, the PUCT and its financial advisor Saber Partners LLC are pushing to set a best-practices standard for RRB issuers, even though, by nature, energy producers are not reliant on the ABS market for funding. The goal is an unusual one for these issuers — to assure the lowest cost to the consumer, according to PUCT Chairwoman Rebecca Klein.

Despite the unique strengths, such as a legislatively mandated periodic true-up mechanism and an inability of consumers to avoid payment — both of which are pointed out repeatedly by researchers — the sector pays a liquidity premium versus other fixed-rate asset classes. Outstanding Texas RRBs, however, are the tightest in the sector, frequently pricing in line with more liquid credit card ABS. Due to the off-the-run status, these typically one-off deals have been forgotten by some issuers following pricing and are viewed by some as “orphaned children.” In fact, of the 21 deals to price since 1997, eight have been either de-registered, pursuant to Rule 15-15D, or have seen filings stop altogether, for no apparent reason, according to filings with the Securities and Exchange Commission. Texas regulators, with the help of Saber, hope to change that.

Imagine the investor reaction if Ford Motor Credit, for example, deregistered and ceased reporting on its outstanding ABS. The trouble, notes Saber CEO Joseph Fichera, is that stranded cost issuers aim to price at levels comparable to others within the sector, rather than the benchmark issuers in other sectors of the ABS market. “RRBs are an asset class with a unique form of credit enhancement, the true-up. Imagine if a credit card issuer could ensure losses of less than 1%, as the true-up allows.”

“At a time when the quality of information available to the market on some [issuer-specific] credit cardbacked bonds and similar securities is getting worse, theCenterPoint/ PUCT effort to create a new best practice should enhance liquidity of CenterPoint’s outstanding transition bonds,” Fichera added. “Ratepayer costs on new CenterPoint issues, if any, could be lower as a result.”

Currently, Texas is viewed in the top tier of states from which RRBs have been issued (see ASR 6/23/03). In addition to the current initiatives, as reported in ASR sister publication Investment Dealers’ Digest, the PUCT has mandated that issuers hold competitive bidding for underwriters to win lead mandates. This is all in an effort to “ensure the lowest possible cost to Texas customers,” added the PUCT’s Klein.

Already the leader among RRBissuing states, Texas originated RRBs have historically priced roughly 11 basis points through other states’ bonds for three-year, 15 basis points through for seven-year and 20 basis points through for 10-year paper, traders said. Researchers have cited the favorable legal environment for energy concerns, as well as constituent support for utility holding companies — the leading employers — within the state.

“Of all the states involved in stranded cost securitization, Texas recognizes the timing issues and secondary liquidity importance to investors,” Fichera summed up. “Most [RRB] issuers are not as concerned about the all-in cost of issuance, because it is easily and unequivocally passed on to the consumer. — KD

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