The Tennessee Valley Authority issued 50-year bonds this week at the lowest rate for such long-term debt in history, saving the federal utility an estimated $10 million a year in interest expenses and stretching out the average length of TVA's bonded debt by about 18 months.
"This is a record low coupon ever achieved on a 50-year debt for a corporation or a government," TVA Vice President and Treasurer Tammy Wilson said Tuesday. "We've been watching the market for some time while telling the TVA story to banks and investors looking for the right timing for our issues."
Tammy WilsonBy the numbers
4.383 percent: Effective rate on the $1 billion of 50-year bonds sold by TVA 4.8 percent: Average borrowing cost of TVA $10 million: Projected annual savings below the budget from the lower borrowing costs for TVA from the new bonds 16.4 years: Average length of TVA bonds 1.5 years: Average additional length of bonds provided by the new 50-year issue $24 billion: TVA debt at the end of fiscal 2014 Source: Tennessee Valley Authority, Fitch bond rating agency
Following the decision last week by the Federal Reserve Bank to not raise interest rates and the subsequent drop in both equity prices and interest rates, TVA decided to price its $1 billion issue Monday. The federal utility quickly got offers for $2.6 billion of bond purchases. The over subscription allowed TVA to cut its interest rate further to a mere 1.35 percent above the already near historic low rates on 30-year federal treasury bonds.
"TVA had a chance to secure low cost financing for an extended period, with interest rates still hovering near all-time lows," TVA's Chief Financial Officer John Thomas said "Meeting the demand for yield and duration that 50-year bonds provide to investors, while locking in savings for TVA, made this a mutually beneficial opportunity."
TVA has been selling non-callable 50-year bonds, so-called bullet-style bonds, since 2006. Such long-term bonds comprise less than 1 percent of all the more than $1 trillion of bonds issued so far this year. But they are an attractive source of long-term capital for utilities, government agencies or other identities with long lives and capital projects
TVA's 50-year bond offering drew demand from money managers, insurance companies and a variety of other investors.
Proceeds from the sale will be used by TVA to refinance existing debt and for other power system purposes.
"TVA's model has stood the test of time, and the demand for our transaction demonstrates continued confidence in TVA's mission," Wilson said.
The new bonds will mature on Sept. 15, 2065, and are not subject to redemption prior to maturity.
TVA bonds enjoys a top rating by Fitch and Moody's and a AA-plus rating by Standard and Poor's.
In its rating of TVA, Fitch analysts said TVA earnings this year are better than projected and the utility has a "stronger cash flow, together with significantly lower annual debt service costs" than in the past. TVA is not allowed to borrow more than $30 billion, but its $24 billion of debt is projected to decline over time, Thomas said.
Although TVA is an independent, self-funding federal agency, Fitch said it gives TVA is top rating because "as a wholly owned corporation of the U.S. government Fitch's expectation is that repayment of the power bonds would ultimately receive the support of the U.S. Government in the event of fiscal distress."
Contact Dave Flessner at dflessner@timesfree press.com or 423-757-6340.