Gary Krellenstein of Lehman Brothers received the highest number of votes in the All-American Municipal Analysts balloting and won by a landslide in the Industrial Revenue and Pollution Control Revenue Bond sector.

James Valone of Fidelity Research & Management was the second team All-American in the sector.

Krellenstein specializes in investor-owned utilities within the sector. "They're really corporate credits, but they trade on the municipal bond desk," he explained.

He recommends IOUs because they are smaller credits that in some cases not everyone bids to buy, so investors can make more money.

IOUs are interesting to analyze in the municipal bond market because they are profit-oriented, have higher coverages than many municipal bonds, have political bodies that regulate rates.

About $10 to $15 billion in high coupon debt is outstanding from IOUSs, primarily because current refundings are not allowed.

However, some ten year call provisions will be coming due over the next few years.

Krellenstein recommends "buying improving IOUs because the overall sector is weak."

To determine which credits are improving, Krellenstein reviews the kind of rate treatments the IOUs have received and are expected to receive. About 215 IOUs exist nationwide, but only the top 10 are recognizable names in the market, Krellenstein explained.

He noted the recession, if it does prove to be a short one, has not hurt the IOUs nearly as much as G.O. bonds.

"There is a greater appreciation of these bonds in the market and they may represent new names for funds," he added.

In the pollution control sector, Krellenstein said the real tough credit questions surround whether utilities will be able to issue additional debt to meet Clean Air Act requirements.

Additionally, concerns that electro-magnetic fields may be harmful represents a potential issue that could balloon into major problems.

Krellenstein noted that after reading the actual studies on non-ionizing radiation, he felt the press reports were overblown. "The report said the non-ionizing radiation may or may not create some health impact," Krellenstein said.

He noted that many other reasons could be the cause of health problems, such as the fact the study groups were in densely populated areas.

He acknowledged that "perception will dominate the issue" and not the facts.

Opportunities exist for investors in rural electric co-ops, he said. Specifically the Ute, Colorado, bankruptcy has seen the three main bidders for the utility ban together and it appears that all creditors will be paid in full.

No bonds defaulted because they were covered by a debt service reserve. "The low coupon bonds dropped into the 60s, but quickly traded up into the 70s and 80s, and currently trade in the 90s," Krellenstein said.

"A lot was learned from the Public Service of New Hampshire bonds," Krellenstein said.

He recommends buying collateralized utility bonds and in the IOU sector investors can buy higher quality issues without giving up much in yield.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.