In the News: Recent Developments

By Richard Leong

NEW YORK, May 6 (IFR) – US utilities are expected to issue a record amount of so-called recovery bonds this year in a push to recoup damages from the growing intensity of recent natural disasters and the closure of legacy power plants as the country transitions away from fossil fuels.

At least US$9.6bn of recovery bonds are slated to price this year, which would surpass the record of US$8.4bn set in 2001, according to financial consulting firm Saber Partners. These securities are backed by special fees investor-owned power utilities collect from their customers to offset costs of environmental disasters and obsolete fossil fuel-powered generators.

“These bonds had been trickling in up until last year,” Saber CEO Joseph Fichera said. “Now we are seeing a waterfall of issuance because of catastrophic events like hurricanes and wildfires from climate change which have resulted in extensive damage to more local power grids.”

Pacific Gas and Electric is leading the charge in this niche part of the debt market with an expected record-setting US$7.5bn of issuance this year. California’s largest electric utility on Wednesday sold a US$3.6bn recovery bond, the second-largest issue of its kind. It is likely to be the first of three such debt offerings from its financing vehicle, PG&E Wildfire Recovery Funding LLC.

Proceeds are intended to recoup costs related to the deadly 2017 wildfires that damaged PG&E’s equipment and power grid. The San Francisco-based company raised US$860m in November via a green recovery bond. Proceeds were for clean-up costs and prevention efforts related to more recent wildfires.

Three recovery bond issues from Southern California Edison, DTE Energy and Entergy Texas raised a combined US$1.06bn earlier this year, while deals from Consumer Energy and Public Service of New Mexico, totalling US$1.05bn, are slated to come to market.

Using a wider definition of recovery bonds, the overall supply of such deals may prove significantly higher, as borrowers who have not traditionally issued such structures – state agencies, power cooperatives and natural gas outfits, for example – decide to take advantage of increasing investor demand for such transactions, market participants said. For instance, Entergy Louisiana is seeking to recover US$3.2bn in costs for damages caused by three hurricanes in 2020 and a winter storm the following year. The debt is being issued through a state agency, and is being marketed as a quasi-taxable municipal bond, investors and bankers said.

Additional spread

Investors have embraced the new offerings because of the top-notch credit ratings and the additional spread when compared to ABS and corporate bonds, market participants said.

“These are Triple A deals,” a senior portfolio manager said. “They look cheap right now relative to their ratings and tenors compared with similar securities.”

The cost of funding is lower than on typical unsecured utility bonds, and in theory, such savings would be passed on to the consumers, market participants said.

While disaster clean-up costs have been the key driver of the resurgence in supply, the transition from fossil fuels, as utilities shutter coal-fired power plants to meet stricter emissions standards, has also spurred more recovery bond issuance.

Consumer Energy plans to issue a US$678m recovery bond for costs associated with the end of using coal-fired generation by 2025, while Public Service of New Mexico is looking to sell a US$327m issue to recoup an investment in a coal-fired power plant it plans to phase out.

Demand is clearly there, if PG&E’s offering is any indicator. Orders for its five-part Triple A wildfire recovery deal at one point during its bookbuilding peaked at US$18bn. It was upsized from the original US$3bn, drawing a broad mix of corporate and asset-backed investors, a source close to the deal said.
The deal’s biggest tranche, the US$1.26bn A-4 piece, which carried a weighted-average life of 21.55 years, cleared at Treasuries plus 125bp, which was well inside its guidance of 160bp–165bp and initial price thoughts of 200bp–210bp.

(Reporting by Richard Leong)
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