The Power of the Callable Bond

Finding the option to refinance debt too costly, the treasurer of the Tennessee Valley Authority unearths a way to ratchet down the premiums.

While the company pays a price for the automatic-reset feature, Hoskins says that it’s much cheaper than making frequent calls on bonds. Perhaps equally important though, is that it enables him to avoid the headache of making bets on when interest rates have reached their low. ”There are always people with 20-20 hindsight that say, ‘Well, you know that if you’d have called the bonds two months later you might have saved 20 basis points on the refinancing,” he explains. An edited version of the conversation, which ranged beyond bonds to the treasury function in general, follows.

As treasurer of TVA, what’s your biggest worry?

I think anytime we see the situation we saw last fall, when the credit markets were close to being frozen — I think that’s one of my biggest concerns. Most businesses that operate as going concerns assume that there are going to be functional credit markets. For a short period last fall that seemed to be in question.

What was your worst day in the middle of that, and what were your fears about TVA, in particular?

I don’t know that we had a “worst day.” In the height of the crisis in late September and early October we had a lower than normal amount of short-term debt, so the amount of short-term funding we had to do was significantly less than normal. In the funding we did, we found good demand for our short-term debt.

But when Treasury Secretary Paulson calls the CEOs of major Wall Street banks to his office and says, “You’ve got to sign this paper before you leave,” that’s got to be a pretty serious situation in the credit markets.

Considering that you were doing so well in the credit markets, what was your fear?

If the credit markets froze up, you’d see companies that rely on short-term funding default on their obligations and likely go into bankruptcy. We’re in the electric utility business; we sell directly to a lot of major companies in the Southeast, and we’d like to see those companies remain healthy, financially viable companies.

Do you have any worries about suppliers?

Not as much. We do credit assessments of all our major suppliers, and we try to execute contracts with suppliers that are the most credit worthy. Or if they’re not, we try to deal with ones who put up some form of credit assurance in advance, for situations like we had last fall. 

How has the credit crisis affected TVA itself?

We pretty much refrained from issuing any long-term debt during the last four or five months of 2008. We were in the market regularly with short-term debt issues, and we had significant demand for TVA short-term debt during this time frame. We issued short-term debt at record low levels, as far as the interest rate goes.


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