After nearly two years of leaping regulatory hurdles, Houston-based CenterPoint Energy priced a $1.25 billion rate reduction bond offering last week. The deal is to be the first chunk off a $1.85 billion RRB program approved this spring, with the next $600 million offering slated to hit the market sometime in 1Q05. Credit Suisse First Boston, Lehman Brothers and RBS Greenwich Capital led the current deal, which priced Friday morning, after ASR went to press.

The deal was structured into five tranches, each rated triple-A by Fitch Ratings, Moody's Investors Service and Standard & Poor's and priced to swaps. The $166 million two-year tranche of the deal was being talked in the three basis points below swaps area, the $253 million five-year tranche of the deal was talked flat to swaps and the $166 million 7.5-year tranche was talked in the five basis points over swaps area. The $351 million 10 year tranche was talked in the six basis points to seven basis points range and the $312 million 12.7-year tranche talked in the 12 to 13 basis points over swaps area. A source close to the deal said it could be upsized.

A banker with CSFB declined to comment, and bankers with Lehman and RBS could not be reached for comment. An official with Texas's financial advisor Saber Partners also declined to comment.

The deal is reportedly the first rate reduction bond deal to attract overseas investors, gaining initial pledges of interest from banks in China, Ireland, Japan, Singapore and the U.K., according to sources familiar with the deal. The deal is attractive to overseas investors because of its favorable 20% risk capital weighting granted by U.K.'s Financial Services Authority. A letter this year from the FSA conferred the favorable risk weighting to all rate reduction bonds from the state of Texas.

The 20% risk capital weighting is comparable to U.S. agency debt, from issuers such as Fannie Mae and Freddie Mac, as opposed to the 100% risk capital weighting on most U.S. ABS and unsecured corporate debt. For that reason, the CenterPoint issue is expected to be attractive to foreign investors looking to diversify out of U.S. agency paper.

In August 2004, CenterPoint was awarded the right to collect $2.3 billion in true-up costs associated with deregulation of the power industry, as well as the right to securitize $1.8 billion of that amount. CenterPoint appealed that decision with the goal of getting the right to securitize another $1.3 billion, but in the meantime decided to go ahead with the then-planned $1.8 billion offering program. Meanwhile, in April, the Texas State Attorney General's office lodged an appeal of the original financing order, but that appeal was dismissed in August, allowing CenterPoint to go ahead with the deal (see ASR, 8/22/05).

The rate reduction bond sector experienced a resurgence this year, with over $5 billion in new issues brought to market from states such as California, Massachusetts, New Jersey, Pennsylvania, and with issuances expected in the next 18 months from utilities in Florida, West Virginia and Wisconsin, as well as $2 billion to $3 billion from utilities in Texas.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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