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.

We actually had a $2 billion maturity due in mid November 2008 that we pre-funded earlier in three transactions from January 08 to June 08. When we pre-funded, we took the results of that funding and paid down short-term debt up till November. That lowered the amount of short-term debt by $2 billion in that September and October time frame.

Sounds like you had some foretaste of things to come.

Well, we certainly saw signs of concern early in the year. I don’t think anybody had a crystal ball about what was actually going to happen. But we basically saw some signs of concern, and we also saw interest rates that were very attractive to us on a long-term basis. We saw attractive long-term funding opportunities, and we decided to take advantage of them because we saw good investor demand for them at the same time we saw attractive low rates.

To what do you attribute the strong demand by investors for your short-term debt at the end of the year?

We’ve always have good demand for TVA’s short-term debt. But in particular there was a clear flight to quality in the fourth quarter of 2008 and we were a beneficiary of that.

Do you issue commercial paper?

We issue discount notes, which are very similar to commercial paper. Technically, discount notes can be issued for up to 364 days, while commercial paper is usually nine months or less. But they’re very similar.

Looking ahead in 2009, what’s your strategy in terms of managing your debt in the face of this crisis?

TVA is an opportunistic issuer. We’re always trying to stay abreast of the market and are looking for opportunities to issue debt, particularly at low interest rates. In the month of January, we’ve seen some improvement in the overall tone of the debt markets. Yesterday was clearly a good example. [On Jan. 29, $22.5 billion of investment-grade debt was issued, according to Bloomberg, which reported it as the busiest day on record]. We’re clearly seeing some improvement in the debt markets. They’re not back to where they were prior to the crisis, but I think we’ve seen some improvement.

How do you expect spend the proceeds of your debt offering this year?

We only invest money for a portion of our needs for new capital projects. That’s the only reason we go to the market; we do not borrow money to meet operating expenses.

Does the current uptick in the bond market give you optimism to plan future projects?

The lower the cost of financing the more favorable some potential projects could look. We’re completing a second unit at one of our nuclear plants that we actually started last year. It will probably be a five-year capital expenditure. Being an electric utility, we build long-lived assets. And we typically issue long-term debt in order to fund those assets.


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