Despite concerns over the approaching federal debt limit and lagging power sales, the Tennessee Valley Authority still was able to borrow money Wednesday at one of its lowest rates ever.
In TVA's first bond offering since the White House proposed its possible sale, the federal utility will borrow $1 billion at an interest rate of only 1.75 percent, or just 0.43 percent above the federal treasury rate for comparable-term bonds. The issue is the largest five-year note for TVA since 1995, when the utility paid a 6 percent interest rate.
Although TVA is an independent federal agency not directly supported by Uncle Sam, the utility still enjoys the implied backing of the U.S. government, which helps it borrow at the lowest rates of any major U.S. electric utility.
That government backing could end if TVA is privatized or sold as the Office of Management and Budget suggested this spring that Congress consider to help limit overall U.S. debt. But so far, the OMB proposal appears not to have hurt the borrowing advantage for TVA.
"There was a lot of investor interest in these bonds and we're very pleased with this rate," TVA spokesman Duncan Mansfield said.
The Fitch rating service gave TVA's latest bond issue its top triple-A rating, which Fitch said "reflects the expectation that repayment of the power bonds would ultimately receive the support of the U.S. Government in the event of fiscal distress." Fitch did give a negative outlook for the TVA bonds, reflecting Fitch's negative outlook for U.S. debt because of the growing deficit and fears about a possible debt default if Congress doesn't raise the federal debt ceiling.
TVA revenues declined in the past year and are projected to fall again next year due to the loss of the utility's biggest customer and improved energy efficiencies by other consumers. But Fitch said TVA remains well positioned to pay any debt.
TVA Chief Financial Officer John Thomas said the proceeds from Wednesday's bond sale will be used to reduce other debt, and for general corporate purposes.
"The 5-year maturity fits well in TVA's financing portfolio, and this is a maturity that we have not accessed in quite some time," Thomas said. "We were pleased to be able to take advantage of sound market conditions to secure low-cost funding."
Investors included a wide variety of domestic and global institutions, including state and local governments, pension funds, money managers and insurance companies. BofA Merrill Lynch, Barclays, Morgan Stanley and TD Securities were joint book-running managers for the offering.
"Our focus on investor outreach helped to drive demand and lower cost for TVA," TVA Treasurer Tammy Wilson said.