America’s utilities end 2019 on a record borrowing spree
U.S. utilities have ended 2019 on record borrowing spree, selling more than $90 billion in bonds for the first time ever.
The surge in debt from NextEra Energy Inc., Duke Energy Inc. and other power giants comes as interest rates are at historic lows, leaving investors hungry for the safe and relatively strong returns offered by utility bonds.
The trend has implications that reach far beyond bond markets and company balance sheets. Utilities are in the midst of a sweeping transformation to modernize grids and slash emissions by replacing coal plants with wind, solar and cleaner-burning natural-gas generators. The flood of cheap cash from bonds is making that possible.
“Financing costs are lower than we ever thought they would be,” Morgan Stanley analyst Stephen Byrd said in an interview. “The low-interest rate environment helps the deployment of renewables.”
There is, however, reason for concern. Capital spending by energy companies was set to reach an all-time high of $136 billion in 2019, according to industry group Edison Electric Institute. And net debt for utilities in the S&P 500 index rose to an average 5.4 times earnings before interest, taxes, depreciation and amortization, up 34% from five years ago.
While utility credit ratings remain strong, they could take a hit if current levels of spending and borrowing continue.
“It’s a concern of ours,” says Maergrethe Amoussou, an analyst at Segall Bryant & Hamill, which manages about $11 billion in fixed-income assets. “I forecast declining credit fundamentals for many of the utilities in my coverage.”
But capital spending is forecast to decline in the next two years, according to Edison Electric. In the meantime, many utilities have stepped-up equity offerings and sold assets to improve fundamentals, including Southern Co. and Dominion Energy Inc.
The borrowing binge by utilities comes as yields on the benchmark 10-year note are at 1.93%, down from 2.68% at the end of 2018 and almost half the average in the past two decades. Utility bonds, meanwhile, have an average yield of about 3%. And since many electric companies are regulated monopolies, investors see them as a safe bet.
Power bonds have returned investors an average 15% this year, the most in at least nearly a decade, as a broader market frenzy sent yields around the world to multi-year lows.