Edison navigates wildfire worries with juicy spread
Edison International is paying up in the high-grade market today to refinance a near-term maturity, as the embattled California utility faces uncertainty around the potential balance-sheet hit from the Los Angeles wildfires in January.
The utility's bonds have been in focus amid questions about whether regulators will find it liable for the Eaton fires, which destroyed more than 9,000 homes.
The US$550m five-year senior unsecured note offering on Tuesday is mainly earmarked for refinancing Edison's outstanding US$400m 4.95% 2025 senior note. Active bookrunners Citigroup, JP Morgan, Mizuho and Wells Fargo launched the Baa2/BBB–/BBB rated note at US Treasuries plus 250bp, coming inside by 25bp from the mid-point of IPTs.
For comparison, Edison's 6.95% 2029 senior unsecured notes traded at a spread of 233bp in the secondary market on Monday, according to MarketAxess.
Despite the wildfire concerns, the attractive spread on offer is expected to draw plenty of investors, including high-yield buyers. The offering launched wider than the average Double B rated junk bond's spread of 202bp as of Monday, according to ICE BofA index data.
"The deal will go well," said Matthew Duch, chief investment officer at Channel Investment Partners, before the offering launched. "They will likely tighten it 30bp or so but get some higher quality high-yield accounts to look at it too. Not because of the downgrade risk but because of the yield."
Duch said the offering had already attracted strong interest from investors when Edison started marketing, an indication that "they built a shadow book prior to announcement."
But others were more skeptical of the offering's value.
One high-yield investor said there were other alternative issuers providing similar yields, such as independent power producers that had long-term contracts with utilities.
"This new one at 6.5% doesn’t really look that attractive to us," they said. "Even our IG guys aren’t playing this new one."
Whether or not the offering is coming at the right price, the wildfire still remains front and center for credit investors who want more clarity on regulators' investigations into the Eaton wildfires.
Edison CEO Pedro Pizarro said there was no defined timeline for the investigations, according to a February 27 earnings call.
In particular, investors and analysts want answers on how much Edison could ultimately recover from the California's US$21bn wildfire fund, which would reimburse the company for claims if Edison is found responsible for causing the Eaton wildfire. The utility's executives have said the company would rely on the insurance fund to recover expenses and not lean on capital markets.
"We would be using the fund and not issuing debt the way we were for the '17 and '18 events," CFO Maria Rigatti said on last month's earnings call.
Additional reporting by Paul Kilby