New initiatives, which include lobbying European regulators, have been the primary factor in the longer-than-anticipated marketing period for the upcoming stranded cost securitization from Oncor Electric.
The $790 million series 2004-1 offering, via Merrill Lynch and Wachovia Securities, was initially scheduled for a first-quarter pricing. But the Public Utility Commission of Texas, on behalf of Oncor, has petitioned the U.K.'s Financial Services Authority for a reduced risk weighting. Oncor is also exploring the possibility of offering floating-rate notes, according to sources close to the situation.
The general structure for the deal has been set - three-, seven- and 10-year triple-A bonds. A preliminary term sheet was filed with the Securities and Exchange Commission Feb. 26, and the issuer plans to update the filing in the coming weeks with more detailed information. In addition to Merrill and Wachovia, the selling group will consist of Banc of America Securities, Bear Stearns, Citigroup Global Markets, Credit Suisse First Boston and M.R. Beal & Co.
Oncor is also hoping to tap the currently strong floating-rate demand. The company recently issued an RFP to swap counterparties for this transaction, requesting the unprecedented feature of covering the termination fee by the true-up mechanism.
The new filing will contain a bold statement for an ABS prospectus: "The nature of the broad-based true-up mechanism and the state regulatory pledge of support effectively eliminates, for all practical purposes, all credit risk within the transaction."
"The Public Utility Commission of Texas guarantees that it will take specific actions pursuant to its irrevocable financing orders, as expressly authorized by statute, to ensure that transition charge revenues are sufficient to pay principal and interest on [Oncor 2004-1] Transition Bonds. This is a legally enforceable guarantee from the Commission, a United States public sector entity," reads the swap request fo proposal..
While most in the U.S. already know the aforementioned details of stranded cost ABS, the sentences are included to persuade overseas regulators to clearly define the risk weighting requirements for potential investors to 20% from 100%, essentially expanding the potential investor base.
Under current requirements, European investors must apply a 100% risk weighting against holdings not explicitly guaranteed by
a government entity. The prospectus explains the Texas Public Utility Commission's involvement in the hope that overseas regulators will view it as a form of a government guaranty.
"The issuer of the bonds was formed at the [Texas Public Utility] Commission's behest solely to carry out the Commission's directives, and does not serve any commercial purpose," Texas PUC Chairman Paul Hudson and Commissioner Julie Parsley state in a letter to the FSA, an independent body which regulates the financial services industry in the U.K. "The issuer remains subject to close Commission supervision throughout the process of structuring, marketing and pricing of these bonds, and continuing oversight through at least annual compliance filings."
"However, we have been advised that a significant number of U.K. financial institutions would also have potential interest in investing in the Transition Bonds were the bonds appropriately risk-weighted at 20%," Hudson and Parsley argue.
The PUC and Oncor also address duration risk in the prospectus, arguing that given a substantial discrepancy in collateral performance, tenor is relatively unaffected.
"If retail electric sales are 5% less than the forecasted energy consumption each year for 12 consecutive years, there would be no change in the WAL of any tranche of series 2004-1 bonds," the term sheet says. Furthermore, "if retail electric sales are 15% less than the forecasted energy consumption each year for 12 consecutive years, the WAL of Tranche 3 would extend by less than [one] month. The WAL of the other tranches would extend from approximately 1.2 to 1.6 months."
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