West Penn Power Co. priced a $115 million Rule 144A stranded cost ABS last week with a structure never before used in the sector. The deal is structured so that bondholders are not paid interest or principal for three years, allowing West Penn to pay down outstanding Series 1999-A stranded cost securitization. Interest and principal will accrete, or accrue, during that time, and be paid over the remaining 18 months of the deal's life.
Fitch Ratings analyst Jennifer San Cartier, said the deal is the first in the sector to use such a structure and that she has not heard of any other issuers intending to use it on future deals at this time.
The deal Series 2005-A offering has a 4.24-year weighted life and its single tranche priced at 10 basis points over swaps, one basis point inside of guidance. The deal was led solely by Credit Suisse First Boston. By comparison, the recent $102 million deal issued by Newark, N.J.-based PSE&G earlier this month priced its five-year tranche at one basis point under swaps. Both deals are rated triple-A, but the spread premium on the West Penn bonds is likely priced in because of what effectively amounts to three years at a zero coupon, as investors will not be paid for three years, said one source familiar with both deals. Barclays Capital and CSFB were joint-leads on the PSE&G deal.
Greensburg, Pa.-based West Penn, a subsidiary of Allegheny Energy, issued a $600 million transition bond in 1999, and has not been in the ABS market since. Those bonds had a 10-year average life, and so full amortization is expected in mid-2008, and is required before collection of charges to electricity customers can begin, and investors can be paid. Interest and principal on the 2005 series will accrete until the 1999 series is retired.
Another feature which makes this transaction unique is the elimination of the over-collateralization sub-account, which was made possible by a change to Internal Revenue Service regulations. Forms of credit enhancement for the transaction include a capital sub-account, a reserve sub-account and a true-up mechanism, which can alter the percentage of the customer's charge that goes toward payment on the bonds. The true-up mechanism is built in as a safeguard against fluctuations in the amount of power consumption in the company's service area.
Fitch's San Cartier said the elimination of the O/C sub-account was also used by Newark, N.J.-based PSE&G in its recent deal, and that the feature was likely to be dropped in future deal structures in the sector. "Other issuers may look to explore the possibility of issuing without [over-collateralization] sub-accounts," said San Cartier.
Going forward, Allegheny Energy is expected to issue environmental control bonds, one in the fourth-quarter of 2006, and the other in the second quarter of 2008, totaling $381 million, each with a 15-year maturity. The bonds will be backed by consumer charges, but instead of financing costs associated with power industry deregulation, the bonds will finance environmental-related improvements to a power plant in West Virginia (see ASR, 5/30/05).
Allegheny spokesman Fred Solomon referred inquiries about the deal to a press release. CSFB officials could not comment by press time.
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