Fitch U.S. downgrade cuts country's largest public utility

Fitch Ratings' dim view of the nation's political and fiscal landscape dealt an ancillary blow to America's largest public utility this week when the Tennessee Valley Authority's nearly $20 billion of power bonds were dropped a notch by Fitch following its downgrade of the U.S. sovereign rating on Tuesday.

The TVA, a corporate agency of the U.S., was the largest among several public issuers that suffered downgrades from Fitch due to strong links to the federal government. Fitch cut the TVA's global power bonds to AA-plus with a stable outlook from AAA.

The TVA's debt is not formally government guaranteed, but ratings analysts base their rating in part on the expectation that the utility would likely receive federal support in the event of fiscal distress.

TVA

The TVA is self-funded and profit-neutral. Its bonds, which carry corporate CUSIPs, are federally taxable, but exempt from state taxes. 

"The TVA status as a wholly owned corporation of the U.S. government provides, we think, some implicit support for their bonds," said Fitch Ratings analyst Andrew DeStefano. "How that would work has not been tested and is not known, but is really is a unique setup."

Established by Congress in 1933 during the Great Depression, the TVA's first mission was to foster economic growth and job creation by bringing electricity and creating flood control for poor rural areas in the Tennessee Valley. The TVA now operates the largest public power system in the U.S., supplying wholesale power to about 10 million people, including 153 local power companies, largely nonprofit cooperatives, and municipal utilities, in Tennessee, Alabama, Mississippi, Kentucky, Georgia, North Carolina and Virginia.

The authority does not expect any material impact from the downgrade, according to spokesperson Scott Fiedler. "This is not driven by any TVA credit event," Fiedler said.

The TVA has $18 billion of global power bonds – most of which are fixed-rate, and with maturities staggered from one to 50 years – and another roughly $1 billion of lease obligations. That $19 billion of long- and short-term debt is down by about $6 billion from 2014 levels, according to Fitch. Under law, the authority is limited to $30 billion of outstanding debt.

The TVA typically comes to market once or twice a year, and will likely determine its next borrowing at its August board meeting, Fiedler said.

The authority plans to increase its debt load starting in fiscal 2023 and in coming years, it said in March press release announcing the sale of $1 billion of five-year bonds.

The recent borrowing featured a 3.875% coupon and "attracted interest from a wide variety of domestic and global institutions, including official institutions, state and local governments, pension funds, money managers and insurance companies," the TVA said.

Fitch's downgrade does not impact TVA's collateral obligations, according to an August 1 SEC filing. If S&P Global Ratings or Moody's Investors Service downgrades the credit to AA or Aa2, its collateral obligations would increase by $22 million, the filing said. If the authority ceased to be majority-owned by the U.S. government, its credit rating would likely drop further and it would be required to post additional collateral.

Moody's and S&P currently assign the TVA the same ratings they assign the federal government: Aaa and AA-plus respectively.

Moody's noted in a May 4 report on Washington's debt-limit standoff that the TVA is "less directly reliant on the U.S. federal government than the Bonneville Power Administration or Amtrak ... However, TVA's rating benefits from one notch of uplift to reflect the high probability of extraordinary support from the U.S. government, and a downgrade of the government would eliminate this uplift."