PG&E; Rate-Reduction Bonds Gobbled Up Quickly
Pacific Gas & Electric Co. on Tuesday sold $2.9 billion worth of rate-reduction bonds, the first batch of an expected $7.4 billion by California utilities. Yield-hungry investors snapped them up.
The bonds sold by the subsidiary of PG&E; Corp. are backed by a special charge on electricity bills, making them less risky than bonds backed by consumer debt such as credit card payments. The new securities also offer yields about 0.03 to 0.10 percentage point higher than bonds backed by traditional asset-backed debt and a way for investors to diversify their holdings.
“Here’s a new asset class where you can pick up yield spread and diversify away from credit cards and auto loans,” said Dean Poritzky, who helps manage $3 billion of asset-backed bonds at Boston-based State Street Research & Management Co., which bought some of these new bonds.
“People are going to pay their utility bills. The structure is quite sound,” he said.
Buyers placed orders for several times the amount of bonds available, investors said.
“I got a 10% allocation of what I tried to get, which was pretty standard, I think,” said Andy Palmer, who helps manage $2 billion in bonds at ASB Capital Management in Washington.
The bonds were sold in eight parts, the biggest totaling $875 million due in 7.32 years at a yield of 0.60 percentage point more than Treasuries with comparable maturities. Bonds backed by credit cards due in seven years yield about half a percentage point more than Treasuries.
PG&E; leads three California utilities expected to sell rate-reduction bonds before the end of the year as part of a restructuring of the state’s utility industry starting Jan. 1.
The bonds are created by bundling together a special charge on consumers’ electric bills that by law will be used to pay bondholders. In return, California consumers will get a 10% utility bill rate cut over four years.
Investors say they’re waiting for the next batch of bonds from California before the end of the year and other states later.
Although a consumer group has filed a challenge to the utility bond sales in state court, analysts say the action probably won’t derail them. As more states consider similar bond sales, the market could grow to as much as $150 billion over five years.
“California is the first out of the gate. We look forward to this market developing,” said Robert Kinsey, who helps manage $1.5 billion of asset-backed bonds at Federated Investors in Pittsburgh.
Shares of San Francisco-based PG&E; rose 25 cents to close at $28.19 on the New York Stock Exchange.
