Cleco Power, a Louisiana utility company, issued bonds last week that will finance the cost of repairs of more than $160 million damages sustained after hurricanes Katrina and Rita devastated the region more than three years ago.
The issuer, known as Cleco Katrina/Rita Hurricane Recovery Funding, priced about $180 million in ABS that will ultimately be secured by a storm recovery charge (SRC) added to the bills of Cleco's retail electric customers, according to Fitch Ratings. The rating agency expects to rate the bonds 'AAA'. The bonds are expected to have a maturity of about 12 years, with a legal final maturity of 15 years.
Cleco retained Credit Suisse as lead manager. The Louisiana Public Service Commission (LPSC), which authorized Cleco to collect the surcharge, will be represented by Pathfinder Capital Advisors, said Eve Gonzalez, general counsel to the LPSC.
"This is very exciting," Gonzalez said. "This is the first type of transaction of this kind that has been done in Louisiana to finance disaster recovery of a utility."
Not so exciting, however, was the reception that buyside market participants gave the bonds. The five-year notes came in at 80 basis points over swaps, while the 10.5-year piece priced at 115 over. Yields on the five-year notes looked particularly paltry, especially when considering that yields on recent secondary trades of existing ratepayer-backed bonds were far more attractive from a buyside point of view. In one trade, an investor was able to get 87 basis points over swaps on a 2.3-year ratepayer bond, said that market source.
"I'm not going to participate in that market," that source said.
The Cleco transaction features semiannual SRC adjustment mechanisms, known as true-ups, to ensure that adequate amounts of surcharges are being collected to meet payments of principal and interest, as well as other required charges. The company said it expects the surcharge to amount to about $3 per average monthly residential bill. One strong aspect of the true-ups, Cleco said, is that it provides cross-collateralization between customer classes. Any changes in collection from one customer class will be corrected and reallocated among all customer classes, whether positive or negative. The securitization will also allow Cleco to establish a storm recovery reserve.
Cleco provides electric service to more than 273,000 customers across central and southeastern Louisiana.
Aside from Cleco Power, Entergy Louisiana and Entergy Gulf States - Louisiana jointly received approval to complete a securitization and use the proceeds to finance storm recovery. Both Entergy entities are planning to float about $970 million in ABS, combined, to recover storm restoration costs. The bonds include a future storm reserve fund of about $329 million.
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