This week sees another securitization of utility cost recovery charges, this time from the Utility Debt Securitization Authority Restructuring Bonds Series 2023. The transaction will raise $823.3 million in asset-backed securities, most of which will be tax exempt.
The deal is slated to close on November 2, according to Moody's Investors Service, which will assign ratings to the three tranches of notes being sold to investors.
Utility Debt Securitization will issue tax-exempt restructuring bonds through the 2023TE1 and 2 classes of notes, which will issue $652.1 million and $135.4 million, respectively. One class will issue $35.6 million federally taxable note, the 2023T class. Moody's will assign ratings of 'Aaa' to all of the notes.
Like other utility bond transactions Utility Debt securitizes a special charge assessed on the Long Island Power Authority's customer utility bills, according to ratings analysts at Moody's. Also similar to other utility bonds, a state financing order and securitization law confers the authority to impose the special charge to consumers, which reinforces the trusts' ability to repay investors. There is also a true-up mechanism that adjusts the charge as necessary, according to Moody's.
Another advantage is the large customer base and service territories that help sustain revenue to the notes. The Securitization Law established and fixed the service area is fixed, and includes Nassau and Suffolk counties, which are two of the most affluent counties in the U.S. Further, the service area primarily includes a mix of residential and commercial customers, accounting for 54% and 44% of revenue, respectively.
The Long Island Power Authority is also a strong servicer, which Moody's considers a credit strength.
Yet the rating agency did point out a potential credit challenge. The Authority finds that the securitization's initial restructuring charge will be around 1.6% of a residential customer's 762-kilowatt-hour (kWh) monthly bill, as of November 2023. Combined with the current cost recovery charges on the 2013, 2015, 2016A, 2017 and 2022 transactions, the initial charge is expected to represent 9.7% of a residential customer's 762kWh bill, the rating agency said.
Such a high cumulative restructuring charge could provoke a legal challenge to the financing order or increase political pressure to rescind the or change the Securitization Law.
