Credit derivatives traders were last Friday surprised to see three-year default protection trading on embattled California utilities PG&E and Edison International. Protection on Edison reportedly traded around 825 basis points, and PG&E around 850bps, they added. The trades were unusual because in the near term, units of the companies are likely either to default or be granted regulatory relief, meaning that selling protection on the names is essentially a bet on the near-term outcome of the California power crisis. Each trade was USD5 million. Regulated utility subsidiaries of both companies are facing trouble from their distribution businesses. Operating shortfalls due in large part to structural issues with electricity deregulation in California are forcing the companies to tide themselves over with short-term borrowings. Without regulatory relief, the regulated subsidiaries will have trouble staying solvent, said traders.
At press time, five-year protection on both names was bid in the 800bps range with no offers. Protection widened drastically in the last week in December, as the power crisis became full-blown (DW, 12/25). Senior unsecured debt for both companies is rated Baa3/BBB-. Both agencies have the names on watch for possible downgrade. Fitch rates Edison CCC, on watch for possible downgrade. Spokesmen at Edison and PG&E did not return calls.
