Tuesday, June 28, 2016 02:43 PM

CORRECT: Duke Energy Bond Chooses Corp. Bond Audience Over ABS

By Adam Tempkin

(Bloomberg) — (Corrects wording in headline of story published June 24, adds context about deal and removes part of comment from lawyer not involved in bond.)

• The ~$1.3b Duke Energy Florida Project Finance senior secured rate reduction bond (RRB) priced June 15 in some ways more resembled a corporate bond than an ABS, allowing access to a bigger investor base
• Typically, RRBs have previously been classified as ABS
• The deal consisted of “nuclear asset-recovery bonds” and covers retirement costs of Duke’s Crystal River 3 nuclear power plant, in Crystal River, Fla., which closed in Feb. 2013
• Deal included as “corporate utility bond” in the Barclays corporate-bond index, rather than securitized credit index
• Regarding categorization of the deal:“In the financial markets, what everybody else thinks isn’t necessarily true. You have to do your homework to make things happen differently to unlock the greatest value possible,” Joseph Fichera, CEO at Saber Partners, which acted as financial adviser to the Florida Public Service Commission on the deal, said in phone interview
• “The issuer wanted to execute it as a corporate bond, but several banks wanted to do it as an ABS and ultimately passed on it,” Fichera said
• “Duke Energy deal has several characteristics distinguishing it from ABS transactions including long durations vs typically shorter ABS and no credit tranching,” Fichera said
• “The deal is clearly not ABS. There is no credit tranching (senior subordinate pieces to get rating), no fixed pool of receivables, no receivables at all, no excess spread, OC accounts, or any other ABS feature,” Fichera said in e-mailed message
• “The IRS, FASB, SEC, and Finra all see it for what it is – a corporate project finance security through a ring-fenced subsidiary to lower cost of financing. Now the Barclays Index has confirmed (that it is a corporate bond) as well,” Fichera said
• The bond allows investors with investment restrictions to participate in RRBs, J. Paul Forrester, a partner at the law firm Mayer Brown, said in phone interview
• A better distribution can be achieved on these deals (also known as Ratepayer Obligation Charge, or ROC, bonds) if they are marketed to corporate-bond buyers, as the Duke Energy deal was, Forrester said
• Forrester, who was not involved in the offering, said it’s “perfectly reasonable” to market the deal to a wider base of investors who are capable and confident in buying corporate bonds
• There may be more of these deals in the near future with more nuclear plant retirements, including Diablo Canyon in Calif., Forrester said
• Prospectus for deal states it is a corporate bond, not an ABS, based on an SEC No-Action letter from 2007 referencing previous deals with similar structures to the Duke Energy transaction
• Prospectus states: “The Series A Bonds are corporate securities. Neither the depositor nor DEF Project Finance is an asset-backed issuer and the Series A Bonds are not asset-backed securities as defined by the SEC governing regulations Item 1101 of Regulation AB”
• SEC letter regarding similar senior-secured deals from Monongahela Power Company says that these specific type of rate-reduction bond issuers are not asset-backed issuers
• Categorization of Duke Energy bond as a corporate bond hinges on this letter
• S&P, Fitch, and Moody’s all gave ratings marked with the “sf” designation; prospectus says deal is not an ABS

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To contact the reporter on this story:
Adam Tempkin in New York at atempkin2@bloomberg.net

To contact the editor responsible for this story:
Tom Freke at tfreke@bloomberg.net