Utilities Pursue Financing
From Nontraditional Lenders
By ROBIN SIDEL
Staff Reporter of THE WALL STREET JOURNAL
They are the kind of loans Tony Soprano might love.
In yet another blow to battered investors in the power sector, cash-strapped
companies are turning to expensive financing pacts with nontraditional lenders.
The arrangements, which come as banks shut their wallets to utilities, carry
pricey terms that could come back to haunt the utilities even as they try to fix
their problems.
Xcel Energy Inc., TXU Corp., and CenterPoint Energy Inc. all recently have
entered into these kinds of crucial financing agreements. While the deals ease
near-term liquidity crunches, they can carry high costs to the companies and
their shareholders.
TXU, for instance, struck an unusual pact that allows its lender to convert debt
into common stock at a discount to TXU's recent stock price. Typically, the
conversion formula for such bonds is based on a premium to the stock price at
the time of the deal, not a discount.
"Nobody's doing a deal like this unless they have to," says Robert Rubin, a utility
analyst at Deutsche Bank who last month referred to the ubiquitous television
mobster in a report about CenterPoint titled "Another Tony Soprano Loan!"
The backdrop to these borrowings is a sector hit hard by trading scandals,
accounting inquiries, huge debt loads and low power prices. Big banks, stung by
bad loans to the telecommunications and technology sectors, are reluctant to
renew or enter financing arrangements with another struggling industry.
And 2003 might not be much better: More than $25 billion of debt is coming due
for the nation's utilities next year, according to a recent analysis by Fitch Ratings.
Meanwhile, a recent report from Standard & Poor's estimates that about two
dozen power companies will scramble to finance $90 billion in short-term debt
though the end of 2006.
Some of these deals are in the form of convertible securities, a fairly common
financing arrangement in which lenders receive debt or preferred stock that can
be converted into common shares at a future point. Although expensive, they fall
short of the kinds of transactions pursued a couple of years ago by troubled
dot-coms and biotech companies. Called "toxic convertibles" or "death spirals,"
those were viewed as a last-gasp means of funding for companies that have been
shunned by traditional lenders. The most controversial part of those transactions
was a provision in which the lender would receive more shares as the stock fell
-- further diluting the common shareholders.
As for the latest round of financing arrangements, "I wouldn't call them toxic,
but I'd call them expensive and somewhat onerous," says Robert Kyle, executive
vice president of PCS Research Technology Inc., which tracks the transactions.
"It shows that these companies don't have a lot of options and they have to move
quickly."
Down the road, they can be bad news for shareholders. They may see their
holdings diluted, while the stock price also could fall as a result of
trading-arbitrage strategies related to the deals. Furthermore, if the difficulties
linger, a utility could face a whole new set of problems when the new loans
come due.
Consider Xcel Energy, a Minneapolis utility with 3.2 million electricity customers
and 1.6 million natural-gas customers in 12 states. Formed from the 2000 merger
of Northern States Power Co., of Minneapolis, and New Century Energies, of
Denver, Xcel's financial position has been hobbled by the troubles of subsidiary
NRG Energy Inc. Xcel has acknowledged that the unregulated power-generation
and trading unit could be forced into bankruptcy-court protection.
Last month, when Xcel's $400 million credit line came due and banks refused to
extend the loan, Xcel scrambled to pay it back. The scrambling occurred even
though Xcel's debt is investment-rated, and the utility had $300 million in
available cash.
Xcel in mid-November borrowed $100 million from Chicago hedge fund Citadel
Investment Capital at an 8% interest rate -- well above a typical bank interest rate
and near the level where high-quality junk bonds are trading. The terms reflected
"difficult market conditions, the inability of Xcel to renew its $400 million credit
facility and a tight liquidity situation," according to a Merrill Lynch research report.
On the surface, the relationship with the hedge fund appeared to have been a brief one: About three weeks after it struck the deal with
Citadel, the $4.4 billion-in-market-capitalization Xcel raised $230 million in a convertible-debt offering and repaid Citadel, which made a
quick $7.4 million profit on the $100 million loan. But under terms of the initial $100 million loan, Citadel is entitled for another year to
buy as much as $57.5 million of convertible notes from Xcel that would be convertible into common shares at $12.325 a share.
That is a modest premium to the stock's price of $10.50 to $11 a share in the days before the deal was disclosed in a thick regulatory
filing. Thursday, the stock rose 28 cents to $11.08 in 4 p.m. New York Stock Exchange composite trading.
"Citadel acted as a quick fix for Xcel," says Mr. Kyle, noting Citadel had the upper hand in negotiating terms because Xcel had few
other options.
Citadel, which has about $6 billion under management, declined to comment. Xcel spokesman Richard Kolkmann says the utility is
satisfied with the terms of the Citadel financing, noting that "this was a far better solution" than other terms that had been explored.
Xcel certainly isn't alone. TXU, of Dallas, last month sold $750 million of 10-year convertible notes to private-equity group DLJ
Merchant Banking Partners III to replace a credit line that had been drawn down. The debt securities, which carry a 9% interest rate,
are convertible into common shares of TXU at $13.15 a share, presenting an unusual discount to the utility's trading price of about $15
at the time. The financing pact has given stockholders some comfort; the shares now trade at about $18.
"A convertible done at a discount to the market is definitely abnormal and means that DLJ was able to dictate the terms," Mr. Kyle says.
Furthermore, TXU also agreed to hand over a seat on its board to the lender. Burt Gilson, a TXU spokesman, says the utility agreed to
the terms because it was facing a credit-rating downgrade. "We wanted to make sure that we were prepared for a worst-case scenario
and have ample liquidity to ride through that," he says. Moody's Investors Service indeed lowered the credit rating to junk-bond status.
Meanwhile, CenterPoint Energy, formerly known as Reliant, borrowed $1.3 billion from Warren Buffett's Berkshire Hathaway Inc. and
Credit Suisse Group's Credit Suisse First Boston at a steep interest rate of 12%. It was the latest of several loans that Berkshire
Hathaway has made this year to the battered sector.
More such deals are likely in 2003. Power companies are desperately trying to cut debt by selling assets, but few buyers are interested.
That means strapped utilities may be forced to take the money wherever they can find it.
"Ultimately, when you need money and you're desperate, there are always going to be folks willing to provide that financing at a price,"
says Mr. Rubin of Deutsche Bank. |
