As expected, TXU Electric's stranded cost ABS was introduced to the market last week, and on track for a Friday pricing following a launch Thursday afternoon. What was not expected was the seemingly vanilla appearance of the transaction when all was said and done.
Despite launching at the wide end, or wider than guidance, TXU Electric Delivery Transition Bond series 2004-1 did, however, accomplish its stated goal of re-pricing the sector, bringing it within comparable credit card ABS on the long end of the curve. "The state of Texas is trying to give the greatest value to the investor for their dollars and the greatest liquidity possible to lower ratepayer costs," said TXU's advisor Saber Partners Chief Executive Officer Joe Fichera.
Merrill Lynch and Wachovia Securities acted as joint lead managers for the transaction, with Banc of America Securities, Bear Stearns and M.R. Beal as co-managers.
It remains to be seen if the tight pricing of this transaction will spur the sector-wide tightening that was seen following last August's Oncor 2003-1 deal. That led to dramatic tightening throughout the second half of last year.
Initially billed as containing bonds aimed at both ABS and corporate investors - domestically and overseas - the end result looked more like a typical stranded cost ABS, albeit at historically rich spreads, pricing entirely off of swaps and sold primarily to traditional U.S. ABS investors.
"The ABS market outbid the corporate market," one source close to the deal said. Roughly 70% to 75% of the bonds were sold to traditional ABS buyers, sources said, with 100% ABS investor participation in the three-year A1 class. Of the 25% to 30% of the crossover corporate buyers in on the deal, "almost all were in either the seven or 10-year classes," a source added. The total number of investor accounts was at approximately 40. It was unclear at press time how many, if any, European buyers were involved.
"The all fixed-rate structure, pricing off swaps, was more efficient when accounting for the fixed- to floating-rate swap," the source added.
TXU 2004-1 launched Thursday afternoon at levels of three, 11 and 14 basis points over swaps for three-, seven- and 10-year triple-A paper, respectively. Initial price guidance, disseminated earlier in the week, was set at two to three, six to nine and 10 to 13 basis points over swaps, respectively. Investors were also given the option of buying TXU's bonds interpolated over Treasurys, at levels of 60 to 63 basis points over for the seven-year A2 class and 65 to 68 basis points over for 10-year A3 class.
The widening was blamed on the 66-month principal payment window at the front end and on swap-rate dynamics at the long end. "All this work to price tight and the bottom line is that if I, as an investor, am not going to get any additional yield for my work, I'll stay on the sideline," one buyside source said. "There's no upside for price appreciation."
But spreads aside, much of the criticism from the Street centered on the timing of the transaction, which, depending on one's point of view, cost the issuer, and thus ratepayers, up to 100 basis points in all-in cost of funding.
"Look at where the seven-year swap rate was in March versus [where it is] today," one banker away from the transaction observed. "No amount of tinkering around with triple-A spreads is going to make up for that loss due to the curve movement."
Based on numbers provided by Banc One Capital Markets (which was involved in neither Oncor 2003-1 nor TXU 2004-1), three-, seven- and 10-year swaps were quoted at 2.42%, 3.74% and 4.25% in the first week of March. As of May 21 - the most recent reporting date - three-, seven and 10-year swap rates were 3.61%, 4.85% and 5.25%, respectively, accounting for 113, 111 and 100 basis point increases in all-in yield to the issuer.
Aside from saying that the deal was not ready to be offered throughout the first quarter, Saber's Fichera added that TXU, as an issuer, could not predict the direction of interest rates.
"A number of issuers were caught by the unexpected and sudden rise in interest rates [in the first quarter]. There was no consensus on the near-term future of interest rate fluctuations. We were not ready to offer the bonds in the first quarter. When it turned, it turned rapidly," he added.
The delay was so closely watched by sellsiders in and out of the selling group that an over/under line developed and reports of bets surfaced between bankers involved and not involved in the offering.
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