Junk bond issuers put another feather in their cap yesterday as Gulf States Utilities Co. became the fourth speculative-grade credit to reach the public market in 1991.
The Texas utility offered $200 million of debentures priced to yield 170 basis points over the Treasury curve -- the smallest risk premium of any high-yield issuer this year.
A Goldman, Sachs & Co. team priced the noncallable securities as 9.72s at par. A sinking fund kicks in the fourth year, giving the issue a 5.5-year average life.
"Terrific. I'd say that's a very good price," said one capital markets professional.
By comparison, industrial credit RJR Nabisco Inc., which rekindled the new-issue junk market in April with the year's first high-yield sale, paid 260 basis points more than Treasuries for 10-year debt financing. Moody's Investors Service rates RJR Bal and Standard & Poor's rates it BB-plus -- nearly identical to Gulf States' Ba2/BB-plus standing.
But market players were quick to note that high-yield utilities -- like their investment-grade cousins -- carry less risk and typically yield less than their industrial, financial, and transportation counterparts.
Moreover, Public Service Co. of New Hampshire's Chapter 11 filing on Jan. 28, 1988, was the first investor-owned electric utility bankruptcy in nearly 50 years, suggesting utilities do not share the default risk that permeates the industrial sector.
"It's certainly not a normal junk bond," said Margaret Jones, utility analyst at Prudential Securities Inc. And this particular credit has some pretty strong characteristics -- cash flow is just excellent.
In fact, although yesterday's issue carries junk-grade ratings, Standard & Poor's gives Gulf States' senior secured debt an investment-grade BBB-minus.
"It's a utility that's had a long and difficult history of getting its nuclear plant in rate base, both in Texas and Louisiana, but it has largely turned the corner," said an analyst at Standard & Poor's.
As for high-yield utilities in general, "it's a regulated industry, and in most cases you can count on the fact that no state wants to have a bankrupt utility," the analyst said.
Ms. Jones agreed, saying, "The only thing I could see as a risk of insolvency would be an inability to operate the nuclear plant, River Bend."
The Louisiana Supreme Court recently affirmed a rate phase-in plan for Louisiana's share of about $1.6 billion of the $3.1 billion investment in the River Bend facility, making permanent about $150 million of rate increases implemented over the past four years.
In Texas, a settlement reached in March permitted Gulf States to increases rates by $30 million, adding to the $60 million increase allowed in 1988 for Texas' share of the River Bend construction cost.
Analysts said Gulf States' tapped the debt market to pay down its revolving bank credit.
"They chose to go to the public market to maintain the same capital structural and maintain cash flow for the the repayment of dividends," one utility analyst said.
Among similar credits, bonds of Long Island Lighting Co., which has shed its junk ratings, have recently traded at spreads as tight as 104 basis points.
Lower down the credit ladder, bonds of El Paso Electric Co. -- a utility analysts say could slip into bankruptcy because of strong regulatory and business risk -- have recently been shown at spreads as wide as 350 basis points.
The Gulf States' offering highlighted a modest day in the primary market, where syndicate desks priced about $600 million of new paper.
Among others in the market, Aristar Inc., a consumer finance company acquired by Great Western Financial Corp. in 1983, offered $100 million of seven-year subordinated notes.
A Merrill Lynch Capital Markets team priced the securities with a 9 7/8% coupon to yield 125 basis points more than the seven-year Treasury note.
Moody's rates the issue Baa2; Standard & Poor's rates it A-minus.
In the secondary market, long-term investment-grade corporates advanced 1/8 point, while junk bonds outpaced Treasuries with gains of as much as 1/2 point.
M&A Activity Plummets
Recession and scarce financing likely halved mergers and acquisition activity in the United States so far this year, Securities Data Co./Bond Buyer reported yesterday.
The dollar value of U.S. mergers in the first half of 1991 slid 50%, to $51.7 billion, from the comparable period last year, according to preliminary figures.
U.S. businesses were involved in 1,926 mergers so far this year, down from 2,687 in the first half of 1990.
"I think it will get better -- it can't get any worse," said Nicholas Muhly, senior analyst at Securities Data. He characterized June's $6 billion figure -- about half that of June 1990 -- as "a disaster."
Goldman, Sachs & Co. continues to hold the crown as leading financial adviser in mergers and acquisitions. Goldman served as adviser on deals totaling $23.2 billion.