As regulators continue to investigate industrywide restructuring as an answer to regional electric rate disparities and calls from large consumers for price reductions, the trend of dealing with...
Business & Money
Business & Money
Wall Street bankers say utilities are not effectively telling their story.
How do you value an investor-owned utility? Ever since the Enron debacle, the credit crisis and the economic downturn, many in the investment community say that there exists a need for utilities to better communicate their business vision and corporate model-particularly now that the economy is headed into an economic upswing and utilities will have to compete with higher-yielding financial instruments such as U.S. treasuries, or competing equities with higher-paying dividends.
Furthermore, bankers say that it is not that investors and analysts necessarily don't understand the risks, but that up and down Wall Street there are varying levels of how well the utility industry is understood. Also, these Wall Street experts say, industry regulation and regulators need to provide more clarity about the utility business in areas such as wholesale markets and transmission.
Joseph S. Fichera, chief executive officer of Saber Partners, LLC, an investment bank boutique, explains that many of those who trade equity and debt on Wall Street don't have a clear understanding of the fundamentals, and as a result this causes a lot of volatility in utility financial instruments and how investors perceive the business.
"I would say that many [equity and debt traders on Wall Street] have a minimum level of experience, many don't know the difference between a megawatt, kilowatt, or giga-watt, so what do they trade on?"
Fichera says some securities traders have been basing their buy or selling solely on the so-called "technicals," which essentially uses charts or computer programs to identify price trends in the market. But Fichera is concerned that ignoring the fundamentals in the trading of utility securities simply increases volatility and fails to communicate the long-term risks accurately to investors, or even to the utilities and their advisors.
For example, the volatility created by the liquidity crisis as a result in part due to an overreaction by ratings agencies, has caused many utilities to sometimes underestimate investor demand for their securities and, in some cases, resulted in gross overpayment in their mad dash for liquidity this year. "There was almost a panic approach to raising capital. And in that situation, buyers are king," he says. In fact, there have been specific transactions where utilities have sold debt instruments at an enormous spread, only to find that the very next day in the secondary market the debt instrument tightened by 20 basis points, he says. "That is a huge tightening of the spread. They could have sold that bond at 20 basis points less a day earlier," Fichera says, suggesting that there was a substantial misreading of investor demand and as a result the security was mis-priced.
It is circumstances like these that have prompted Fichera and others to call for an improved dialogue between the industry and Wall Street. He believes that investors recognize there are risks in any investment, but a better understanding of the risks between one entity versus another is needed. Trying to group utilities together is one of the problems, he says. When