Wisconsin is the latest state to hire financial advisor Saber Partners to oversee an upcoming public utility securitization program, in the hopes of reducing pricing levels for the proposed deals and to drive the underwriters it hires to go the extra mile when selling the bonds.
With former Prudential Securities investment banker Joseph Fichera at the helm, Saber is advising Wisconsin's Public Service Commission (PSC). The consultancy has become a familiar name in the ABS market over the past three years because of its advisory work with the Texas Public Utilities Commission (PUC) and New Jersey's public utilities board.
Wisconsin Electric Power Co. will issue an estimated $500 million of bonds backed by a charge passed along to consumers covering the utility's "environmental control" activities, rather than more traditional pre-deregulation associated stranded costs. A Commission mandated fee added to consumer's bills would be earmarked for bondholders. The underwriters, which the Wisconsin PSC - in conjunction with Saber - will choose as well as the timing, have yet to be announced.
While advising these state commissions, Saber introduced a number of innovations designed to expand the investor base for the transactions. The end result was tighter spreads. In Texas's case, the consultancy instituted a $1 million bonus for the highest selling co-manager and also grilled prospective underwriters about their past selling performances.
"It is appropriate to retain a financial advisor to participate in the proposed transaction on behalf of the commission in order to ensure that the transaction results in the lowest environmental control changes consistent with market conditions," the Wisconsin PSC said in a report issued last week announcing the upcoming offering. "The commission expects that the net effect of the financial advisor will be to lower the financing costs associated with the issuance of the securities."
Whichever underwriter does get the mandate, however, will find its work cut out for it. Saber's primary responsibilities will be to advise the Wisconsin PSC to "ensure that the structuring, marketing and pricing of the bonds result in the lowest cost of funds," the commission said.
The practice of hiring a company like Saber as essentially an overseer of underwriter performance, with the intent of trying to get better market pricing and thus reduce financing costs to ratepayers, is a growing trend for state commissions now launching rate recovery' securitization programs. There is now a growing debate in California over whether that state's power commission should hire an advisor for an upcoming $2 billion securitization for Pacific Gas & Electric Co.
"The world is changing and the underwriters don't like it," said one industry source.
Saber's work in Texas, in which it acted as a joint decision maker with the Texas PUC, drew much market attention, as the advisor claimed its efforts helped all the securitizations in which it had input to price at the tightest levels to date. This, it added, has subsequently compressed spreads sector-wide.
In 2002 Saber and the Texas PUC proposed a deal structure for Texas-based utility Central Power & Light Co. that provided a $1 million bonus as an incentive for co-managers to improve their distribution efforts. Such incentives paid off, as Central Power's $797 million securitization experienced more than 10 basis point tightening on some tranches, bringing them in line with top-tier credit-card ABS at the time.
Some underwriters, however, have groused about the extensive details Saber has demanded. For the 2003 Oncor Electric Delivery Co., Saber required aspiring co-managers to answer an intensive questionnaire that asked, among other things, whether the banks had unique nontraditional ABS buyers they could bring to the transaction, thus achieving the tightest possible pricing.
Some prospective underwriters balked, however, and begged off the deal rather than answer the questions.
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