Edison Plans Bond Offer at 13% Rate
Edison International is offering investors what analysts are calling an unprecedented 13% interest rate for $1.2 billion in notes to refinance debt. Even so, it’s far from certain that the Rosemead-based power company will find enough buyers to complete the deal.
A failure by Edison to refinance $618 million in bank debt that comes due June 30 and an additional $250 million in notes due in July could put the company precariously close to bankruptcy and cast a shadow on California’s plan to sell $12.5 billion in bonds to pay for power purchases, said Dan Scotto, a bond analyst at PNB Paribas in New York.
“Even though it would at first appear to be a company setback, it would really be a major setback for the state,” said Scotto, who added that Edison’s credit troubles could translate into higher prices for California’s proposed bond offering.
Edison, however, said Thursday that the deal is moving forward.
“We believe our deal is going well, and we are comfortable with it,” said Jo Ann Goddard, vice president for investor relations. She declined to discuss other details of the offering.
Goldman Sachs Group, Edison’s investment bank, expects to formally price the offering Monday. Edison officials would not comment on the proposed price of the note offering, but Wall Street sources said the power company was shopping the issue at the 13% rate.
Edison floated the plan earlier this month as a way to tap the borrowing power of a profitable subsidiary to trim debt that comes due this year and to insulate itself from a possible bankruptcy of its ailing utility unit. The utility, Southern California Edison, has lost billions of dollars on electricity sales over the last year.
The high interest rate on Edison’s proposed sale of seven-year notes is about double what a credit-worthy company would pay for a similar bond or note issue and would add a premium amounting to tens of millions of dollars in annual interest costs to the company’s already strapped financial condition, analysts said. It’s a full two percentage points higher than the average rate for other junk, or speculative, bonds. And corporate bonds with similar ratings are going out at 9% to 10%.
Edison originally started marketing the issue at 12%, a full two percentage points higher than what analysts initially expected, but then raised the rate to 13% in recent days because it was finding few takers on Wall Street.
“The word is that they couldn’t get people interested and that they might not be able to get it done,” said Kurt Stabel, a money manager at Street Asset Management in Newport Beach.
The higher rate, however, might be pulling investors out of the woodwork and has increased the chance that Edison will pull off the deal, Scotto said.
“This never promised to be a day at the beach,” Scotto said. “I think it is really a question of find the right price, the price at which people feel comfortable with the risk.”
Both Stabel and Scotto said that Edison’s note offering is unusually complicated and requires far more explaining or “selling” than typical corporate offerings.
Mission Energy Holding Co., a company created by Edison for the sole purpose of issuing these bonds, will offer the notes. The assets of Edison Mission Energy, a subsidiary that owns a network of power plants across the United States and in Asia, Australia and New Zealand, will secure the debt.
Mission Energy Holding plans to issue the proceeds to Edison in the form of dividends, giving the parent company funds to pay off a substantial portion of its debt.
The notes will have a credit rating of BB-minus and come due in 2008, according to bond rating agency Standard & Poor’s. That’s slightly higher than the near-default CC rating now carried by Edison.
If the offering failed, Edison would face a series of difficult choices that range from depleting its cash cushion to going back to its bankers and begging for continued forbearance.
Its SCE subsidiary already has defaulted on $931 million in bonds and notes. That triggered a default in bank lines of credit at Edison International and SCE, which has since operated under extensions from its lenders.
Edison has about $3 billion in cash, including $2 billion held by SCE, according to regulatory documents.
“This could all still unravel, but I have been impressed with [Edison’s] effort to inch along so far,” said Ellen Lapson, an analyst at Fitch Inc., a corporate credit rating service. “Who would have thought that they could have lasted so many months after their first default in January and still not be in bankruptcy?”
Positive developments for Edison, including a deal to hold small generators at bay with partial payments from SCE and progress at crafting a rescue plan in both the state Legislature and the Public Utilities Commission have sparked a small rally in the company’s stock.
Edison shares have risen 8% this month. They gained 21 cents Thursday to close at $11.90 on the New York Stock Exchange.
