BY DAVID BELL

Structured Finance

Underwriters to face added scrutiny on debt sale

California utility PG&E received approval on Thursday to issue US$7.5bn of recovery bonds to finance costs and expenses related to wildfires in the state in 2017. It will be the largest utility securitisation package in history when it emerges, but the regulator included several requirements aimed at protecting consumers that will heighten scrutiny on underwriters.

The financing order by the Public Utilities Commission of California gives PG&E the authority to finance wildfire costs by issuing bonds backed by increases on bills to ratepayers over the next 30 years.

The approval gives PG&E the ability to issue up to three series of recovery bonds by the end of 2022. At US$7.5bn the financing is the largest package ever seen of its kind and is almost double the outstanding amount of rate recovery bonds in the market, according to data from boutique financial advisory firm Saber Partners.

PG&E has indicated that it would issue bonds with maturities up to 30 years, which would also be the longest dated ever seen in the sector.

Citigroup is working as a structuring adviser to the utility. Underwriting fees are expected to be between US$26.5m and US$41.25m, according to the financing order.

This kind of utility rate securitisation has been around for years, and PG&E has issued them in the past. Utilities and bankers say it is cheaper than traditional sources of financing.

PG&E says the deal will reduce consumer rates by around US$4.2bn on a present value basis compared with traditional utility financing.

But the plan did not go through without some tweaks from regulators.

Most importantly, PG&E will have to fund a “Customer Credit Trust” for consumers who have fixed-recovery charges imposed on them. This would be paid out of company profits. But while bond investors would be protected by the legally remote securitisation vehicle and utility payments in the event of bankruptcy, it is not clear what would happen if the company itself failed to keep up with payments to the customer trust.

“This is not a plain vanilla transaction,” said Joseph Fichera, CEO of Saber Partners. “It’s supposed to be rate neutral to the customer and that is a big source of controversy because putting an irrevocable charge on the bill to pay bond investors but also promising to give ratepayers a credit for that charge from the utility’s profits has never been done before.”

The Public Utilities Commission of California also said that PG&E must allow an external “finance team” that includes the commission and its general counsel, to perform an oversight role in connection with the bonds, which will put extra scrutiny on underwriters.

The finance team will have the ability to participate in all calls and communications regarding the structuring, marketing, pricing and issuance of each series of bonds.

The company and the lead left underwriter would also be expected to provide written certification on the day of pricing confirming that the deal complies with the financing order and that the issuance would reduce “to the maximum extent possible” the rates on a present value basis that consumers within PG&E’s service territory would pay as compared with the use of traditional utility financing mechanisms.

“This is a really strong credit and many times investors get paid a higher yield compared with other Triple A credits than they should,” said Fichera. “But when regulators have stayed involved in the structuring and marketing process and haven’t just turned it over to underwriters and their favoured customers, regulatory oversight and active involvement has produced better, fairer results for all.”

PG&E will use the proceeds to retire US$6bn of temporary utility debt and pay or reimburse US$1.35bn in cash payments to the Fire Victim Trust. The company hopes these steps will put it on a track towards regaining its investment-grade credit ratings.