Weekly Wrap: SoCal Edison revives recovery bonds for wildfire mitigation

February 18, 2021 9:00 PM

Southern California Edison on Thursday priced its first series of recovery bonds in nearly a quarter century, raising funds through a stranded-cost securitization to recoup capital expenses for wildfire mitigation efforts.

According to S&P Global Ratings and Fitch Ratings, SoCal Edison was marketing $337.8 million in bonds that will be secured by the fixed recovery charges that will be imposed on the monthly bills of about 5.2 million customers in its 50,000 square-mile service territory.

SoCal Edison is permitted to securitize its expenses to fortify and strengthen its powerline equipment from wildfire spread in the state. According to Fitch, SoCal has been allocated $1.58 billion of the $5 billion wildfire mitigation fund. SCE may issue further bonds to recoup costs, according to Fitch.

SoCal Edison estimates "the net present value benefits from securitization financing would be approximately $173.5 million, compared with SCE ratemaking and the $52.5 million financing under its authorized capital structure," Fitch's Feb. 10 report states.

Blackouts And Fires Batter California Again As High Winds Rage

The bonds pricing this week included a $137.78 million Class A-1 tranche due November 2033 at a fixed rate of 0.86%; a $100 million Class A-2 tranche due May 2040 at 1.94%; and a $100 million Class A-3 tranche due November 2025 at 2.51%. Each tranche carries an AAA rating from S&P and Fitch.

It is the first rated recovery bond transaction for SoCal Edison since 1997, Fitch's report stated.

The securitization was authorized by the California Public Utility Commission last November, and permitted under provisions of 2019 legislation aimed at providing utilities relief from wildfire-related expenses (Assembly Bill 1054) that was signed into law by Gov. Gavin Newsom that fall.

The bill's priority measure established a $21 billion fund to stabilize the finances of state's electric utilities following catastrophic losses from wildfires in 2017 and 2018, including litigation costs. But the SCE Senior Secured Recovery Bonds, Series 2021, were made possible by the securitization provision in AB 1054. SoCal is the first of California’s electric utilities to tap into the wildfire mitigation fund.

The SCE Series 2021-1 deal was arranged by Barclays and RBC.

Glen Fest

James Crawford/guynamedjames - stock.adobe.com

Lender touts 'crowdsourced' subprime auto securitization

A Texas-based auto lender said it is preparing a debut, 144A-market subprime auto ABS deal this year, structured through its AI-driven crowdsourcing platform it says directly matches investors with "buy here pay here" independent lot dealers.

Although Agora Data has not set a date to launch the $100 million to $150 million transaction, the deal would follow a private placement completed in December that utilized artificial intelligence and machine learning to analyze and select loans from its $1 billion loan portfolio.

“We expect to do larger deals with increasing supply in the 144a market this year,” Agora’s chief revenue officer Chris Hawke told Refinitiv. “It would expand the universe of investors who can participate in our deals,” and lower costs of financing to a riskier non-prime borrower base.

The $100 million December private placement pooled loans from borrowers in the deep subprime space, with average FICO scores in the 500s, according to Hawke.

Hawke, who co-founded Agora in 2017, is a former asset-securitization and asset-banked specialist at Citigroup and Bank of America, and most recently was a managing partner at Center Street Finance.

Glen Fest

Cash-out refis help drive pandemic-era mortgage boom

A fuller picture of the factors that drove the great U.S. mortgage boom of 2020 is starting to emerge.

The homebuyers who took advantage of rock-bottom mortgage rates during the pandemic included many investors and purchasers of second homes who flocked to the market at levels unseen since before the Great Recession, according to new data from the Federal Reserve Bank of New York.

Cash-out refinancings also hit a post-financial-crisis high, as many households tapped into the equity they have accumulated as home prices have climbed over the last decade. Mortgage origination volume last year totaled $3.7 trillion, by far the highest level since 2003.

The data is most notable for one major contrast that it reveals between the current boom and the previous one: borrowers’ creditworthiness. Last year, roughly 70% of mortgage borrowers had credit scores of 760 or higher, compared with around 30% in 2003.

The 40-percentage-point gap is a reflection of both lenders’ reluctance to extend credit to borrowers with subpar credit and prime borrowers’ confidence in their ability to handle more debt. During the subprime lending boom, many borrowers with little equity took on more debt than they could afford.

“Researchers have concluded that the 2003 refi boom had long-running consequences, contributing to over-leveraged balance sheets as home prices fell,” experts at New York Fed noted in a blog post published Wednesday.

While U.S. homeowners withdrew $182 billion in equity last year, the comparable figures from 2003 to 2006 were higher, even without adjusting for inflation, according to the New York Fed researchers. The average amount withdrawn by a homeowner was also significantly lower in 2020 than it had been in 2019.

“The median cashout withdrawal in 2020 was only $6,700,” the researchers wrote, “suggesting that at least half of the refinancers borrowed only enough additional funds to cover the closing costs on the new mortgage.”

Kevin Wack

Party City taps HY bond market to refinance loan debt

Data research firm Trepp noted Party City Holdco Inc. was the latest company this month to take advantage of a red-hot high-yield bond market to refinance debt held in U.S. CLOs.

The distressed retailer (which carries a near-default triple-C ratings from Moody's Investors Service and S&P Global Ratings) announced earlier this month that it would be offering senior secured notes due 2026 totaling $725 million, and use the proceeds to help refinance a $1.21 billion leveraged loan maturing next year.

The offering priced on Feb. 9 with Party City paying a yield of 8.75%, inside of the 9.5%-10% initial price talk range, according to Bloomberg.

Party City's loan, which carries a coupon of one-month Libor plus 250 basis points, is held by over 150 CLO vehicles in December, or approximately 14% of all US deals in Trepp's CLO database, according to the research firm.

Trepp noted that since last June, the credit's price had fallen after the onset of the COVID-19 pandemic, but has rebounded in the low $90s range (per $100 par) in December and most recently was slightly below par, according to IHS Markit.

Glen Fest

Munshi Ahmed/Bloomberg

Biden extends mortgage forbearance and foreclosure protections

With the end of the first 12-month CARES Act forbearance periods fast approaching, President Biden extended borrower payment protections for federally backed mortgages.

The administration pushed both the forbearance enrollment deadline and the foreclosure moratorium on FHA, VA and USDA loans by three months to June 30, 2021. Borrowers who entered forbearance prior to June 30, 2020, will be allotted an additional six months of coverage in three-month increments.

The announcement comes one week after the Federal Housing Finance Agency allowed borrowers with mortgages backed by Fannie Mae and Freddie Mac to request an additional three months of forbearance. These combined efforts should protect about 70% of U.S. single-family home loans, according to the White House’s press release.

See story

Paul Centopani

Citi Faces Finders Keepers Law in Fighting $500 Million Ruling

Chris Ratcliffe/Bloomberg

Citi may get stuck with huge chunk of distressed Revlon debt

It was hardly the role Citigroup’s bankers signed up for when they helped Ron Perelman’s Revlon borrow $1.8 billion in 2016. But, now a back-office blunder is leaving the financial behemoth faced with the prospect of becoming one of the biggest creditors to the troubled cosmetics empire.

A surprise ruling by a New York judge on Tuesday blocked Citigroup’s efforts to recover $500 million it had mistakenly sent Revlon’s lenders last year as the so-called administrative agent on the company’s loan. While the bank says it will appeal the decision, a failure to overturn it will leave Citigroup holding the bag on the bulk of the $900 million remaining on the loan that Revlon hasn’t itself paid.

“Revlon’s loan was never paid off. So if appeals fail, Citi will ultimately step into the shoes of the lenders and own $500 million of that nearly $900 million term loan,” said Philip Brendel, a senior distressed debt analyst at Bloomberg Intelligence.

Representatives for Citigroup and Revlon declined to comment.

See story

Bloomberg