If there was any question about utility companies’ stability in a souring economy, the bond market just provided a resounding stamp of approval. Amid the worst economic outlook since the Great Financial Crisis (2007-2008), many companies have had trouble accessing capital. But we’ve seen several utility companies issue new debt at surprisingly favorable terms. We believe those deals ultimately speak volumes about the equity value of these companies.
Consider a few of the deals that have recently come to market:
- Wisconsin Power and Light issued $350 million in 30-year debt at 3.65%.
- Southern California Edison issued five-year first and refunding mortgage bond with a 3.7% coupon, and upsized the deal from $400 million to $600 million.
- Florida Power and Light issued $1.1 billion of five-year, first mortgage bonds at 2.85%.
While every debt deal is different, we view these as relatively normalized yields on these companies’ credit, and believe they are healthy indicators these businesses will be able to access capital to continue their growth initiatives through the downturn. Bond markets have been less kind to companies in other industries. For example, Ford Motor Company will pay interest between 8.50% and 9.625% in a new three-part debt offering it issued.
The Fed’s unprecedented actions to backstop corporate debt offerings – even from companies with below investment grade ratings – have helped Ford and other companies tied to economically sensitive industries continue to access credit markets.
Those actions have undoubtedly helped the debt offerings of utility companies as well. But the favorable terms secured by utility companies speaks to bond investors’ confidence in their business models.
At Reaves, we take a defensive approach to equity investing, focusing on stocks of companies in essential service industries that form the foundation of a modern economy. Our view is that a portfolio of such companies may outperform broader indices in market downturns, leading to better investment outcomes over the full market cycle.
In the worst economic environment the U.S. has experienced in more than a decade, we’ve been pleased to see bond markets share our view on these companies’ stability.
