Moody's Investors Service has concluded that a properly structured securitization backed by the future cash flow from a utility's stranded investments can achieve a credit rating higher than the rating of the senior debt of the utility.
Moody's said this ability bodes well for the increasing number of investor-owned utilities expected to issue up to $75 billion of such securities by 2000 to recover uneconomic investments.
In the report, Stranded Utility Costs: Legislation Jolts the ABS Market, Moody's predicted the securities' high ratings will attract asset-backed investors (em typically AA or AAA (em because, "The stream of fees that will support these securitized transactions isn't linked to the existence of any specific utility, but to customer usage, and must by law be paid."
Legislative Issues. However, Moody's warned that understanding the legislation which created the fees is vital in assessing the credit risk of stranded cost securitizations. Legal concerns include the property right characteristics of the fee revenue stream; the transfer and assignability of those rights; security interest issues; and provisions for a true-up mechanism. Moody's pointed out state law usually treats the sale of utility's fee revenue to a financing entity as a true sale rather than a pledge for other means of financing. Such language simplifies the legal analysis regarding the ownership of the asset, which usually requires substantial legal analysis in other securitizations.
Political Risk. Investors should focus on provisions for rescinding or altering the legislation/rate order that authorizes the tariff.