New York, January 14, 2002 — The issuance of bonds backed by electrical utilities stranded-cost payments should decline sharply in 2002 to about $2 billion, from last year’s record $8 billion — a 75% decline — says Moody’s Investors Service in a new report.
“The approximately $2 billion in securitizations projected for 2002 represents the remainder of the Texas and New Jersey securitizations, and winds down this sector. This figure may increase if other utilities seek legislation to recover stranded costs, an event considered unlikely,” says Moody’s Bruce Fabrikant.
Total cumulative market issuance of $27.5 billion has fallen short of initial industry estimates of $50 billion -$150 billion since the economics of the industry have changed and some of these investments are no longer uneconomical in a deregulated environment. Credit quality is expected to remain stable.
The meltdown of electric deregulation in California dominated the asset-backed stranded costs recovery sector in 2001. The state’s largest investor-owned utilities, Pacific Gas and Electric Company (PG&E) and Southern California Edison Company (SCE) faced a liquidity crunch, caused in large part by the inability of the utilities to pass along in retail rates abnormally high wholesale power procurement costs.
This lead to the voluntary bankruptcy filing of PG&E, the pioneer in this asset sector on April 6, 2001. As expected, both the company and bankruptcy court respected the bankruptcy-remote structure that the parties had established in order to isolate the assets of PG&E’s securitization from PG&E’s bankruptcy estate. PG&E remains as servicer of the transaction and has continued to collect and remit the securitization tariff, Fabrikant says.
“Moody’s believes that the financial stress experienced by investor-owned utilities should not affect the Aaa ratings on the securities issued to recover their above-market assets (stranded costs) because stranded costs securitization is based on a tariff that is isolated from the utilities’ corporate assets when it is sold to a special-purpose bankruptcy-remote entity,” the analyst said.
In fact, the bankruptcy remoteness of these transactions is stronger than that of other, purely corporate ABS transactions due to the explicit recognition, by state legislation, of the “true sale” of the right to collect the tariff as well as the first lien on the asset that is often granted by statute upon its transfer, Fabrikant says.
The report is titled “2001 Review and 2002 Outlook: Stranded Utility Costs Securitization: Credit Issues In Spotlight — Lights Out? Sector Issuance Projected To Lose Steam.”