BRADENTON, Fla. — When the Municipal Electric Authority of Georgia sold $2.66 billion of bonds in March for the first U.S. nuclear power project in nearly three decades, it faced a challenge. With interest rates so low and the financial markets so uncertain, how would it invest such a huge portfolio of bond proceeds before it needed to draw funds to pay for its share of two new nuclear units at Plant Vogtle near Augusta?
Most of the debt was issued as taxable Build America Bonds, and officials with MEAG Power said they had to match a longer-than-traditional construction draw schedule of over seven years, versus a more typical schedule of two to three years, with investments that would limit negative arbitrage.
The agency also had to abide by a conservative investment policy governed by Georgia law, the authority’s own policies, and bond covenants requiring investments largely in government-related securities, MEAG treasurer Dave Coss said in an interview Monday.
While MEAG has its own investment team, it turned to PFM Asset Management LLC to devise a strategy that examined a number of scenarios in which investment decisions were largely based on risks and rewards as opposed to predicting where interest rates would go, Coss said.
PFM Inc. served as financial adviser on the bond sales.
After studying past recessions and the yield curve, PFM Asset Management concluded that interest rates would have to rise faster and higher coming out of the current recession than they had after previous economic downturns to justify keeping a significant amount of money in a short, cash-like position, managing director Steve Faber said in a release.
“There was nothing at the time that provided a clear signal of an impending economic rebound, so the less-risky strategy was to invest more fully than most of us had originally anticipated,” Faber said. “Our approach in working with MEAG Power was determined more by sensitivity analysis — defining the quantitative impact of differing investment strategies — rather than making a market prediction in such an uncertain environment.”
Coss said the decision was made to keep the money in shorter maturities while completing analysis and waiting for an advantageous market entry point. Several weeks later, when yields on investments suitable for timing the draws needed for construction costs increased by 25 to 30 basis points, MEAG began investing some of the proceeds.
About 15% of bond proceeds were kept in reserve to invest later if interest rates rise more, Coss said, though the portfolio can be restructured if the yield curve shifts.
“We’ve been pleased with the results” of the investment strategy, Coss said. “Interest rates have come down significantly since this program was put in place and at this point it is unlikely that we could duplicate what we did until rates begin to rise a great deal.”
MEAG is the second-largest issuer of BABs in the country so far this year, according to Thomson Reuters.
The bonds priced March 3, 5, and 8 and totaled $2.6 billion of BABs and $48 million of tax-exempt bonds. Each series sold as separate credits secured by a different combination of contracts with MEAG participants or two other public power agencies purchasing a portion of MEAG’s share of the nuclear-generated power.
The largest of the three sales was $1.2 billion of BABs and $24.1 million of tax-exempt bonds sold on March 3.
The BABs sold with a term maturity in 2057 pricing with a net interest rate of 4.31% with the interest subsidy from the U.S. Treasury.
The tax-exempt portion sold with the first maturity in 2017 and priced to yield 2.91 % with a 5% coupon. The 2019 maturity priced to yield 3.36% with a 5% coupon and the final maturity in 2040 priced to yield 4.9% with a coupon of 5%.