Last Stranded Cost Bond Prices

The last stranded cost bond was priced last week.

The last stranded cost bond was priced last week. The $1.74 billion AEP Texas Central Transition Funding II went out with a bang, garnering the tightest spreads ever seen for the asset class and bringing in a broad base of 75 investors, including the first Chinese buyer, said Joseph Fichera, ceo of Saber Partners, which advised the Public Utility Commission of Texas, which issued the financing order for the bonds.

Stranded cost bonds securitize extra charges on electricity customers’ bills. The AEP Texas deal is the last portion of funding authorized to recoup costs from deregulation of the overall electricity industry that started in the 1990s and continued into the early 2000s. The market has seen more than $36 billion of the bonds since 1997, Fichera said.

The deal’s seven-year class was priced at swaps plus three basis points compared with swaps plus five basis points for the JCP&L Transition Funding II that was priced in August. Credit Suisse, JPMorgan and RBS Greenwich Capital Markets were the leads.

Like other stranded cost bonds, the deal has a state of Texas guarantee that it will not take or permit any action that impairs the securities. It also has a true-up mechanism where the utility can increase customer charges every six months to ensure the timely payment of principal, interest and administrative costs.

While stranded cost bonds may be a thing of the past, investors can still look forward to other bonds from utility companies, Fichera said. The pipeline for bonds to recoup costs for everything from storm recovery to environmental upgrades remains strong, he noted.