Analyst: Patient Hawaiian Electric bondholders may preserve principal

Securities issued by Hawaiian Electric Co. — including tax-exempt revenue bonds guaranteed by the company — have been in freefall in the wake of a devastating wildfire in Maui that killed at least 115 people. 

The company’s bond ratings have been cut to below investment grade,  pushing prices on its municipal bonds as low as 60 cents on the dollar, while its common stock price dropped to below $10 a share from $37.36 the day before the Lahaina fire. The utility may need to seek bankruptcy protection as lawsuits against it pile up; plaintiffs and others blame the company and its subsidiaries for not turning off power amid dangerous wildfire conditions.

“The Companies do not yet have enough information to meaningfully evaluate whether any of these actions would reasonably be expected to result in a Material Adverse Effect,” according to a notice signed by Hawaiian Electric CFO Tayne Sekimur, posted last week on the Municipal Securities Rulemaking Board’s EMMA bond disclosure website. “But the Companies are nevertheless providing this notice on a precautionary basis.”

While it may take years for the lawsuits to be adjudicated or settled, at least one municipal bond analyst believes the eventual outcome for bondholders may not be as bleak as it seems right now. 

Hawaiian Electric had about $542 million of tax-exempt obligations outstanding at the end of 2022, according to the firm’s Form 10-K annual report, which was posted on the Municipal Securities Rulemaking Board’s EMMA bond disclosure website.

While a Chapter 11 restructuring by investor-owned utility is likely “inevitable” in order to deal with the large number of legal claims — at least $6 billion and counting — Andy DeVries, co-head of U.S. investment grade credit and senior utilities & power analyst at CreditSights, is fairly optimistic about the eventual outcome for the company’s credit and its bondholders.

“In the history of utility bankruptcies going back to the 1980s and nuclear cost overruns (El Paso Electric, Public Service of New Hampshire), no regulated [operating company] bondholder has ever seen principal impaired,” DeVries wrote in a report to clients last week. “The same was true in both Pacific Gas & Electric bankruptcies (2001 and 2019) and Entergy New Orleans after hurricanes (2005).”

In addition to its muni bonds — which mature between 2025 and 2049 —Hawaiian Electric also has $1.15 billion in taxable senior notes, for a total long-term bonded debt of $1.7 billion.

Since Aug. 15, all three rating agencies have cut Hawaiian Electric to speculative grade.

“The rating action reflects potential exposure to large third-party wildfire-related liabilities if utility equipment is determined to have ignited recent wildfires in Maui and the utility is deemed responsible for such claims under applicable negligence standards,” Fitch Ratings wrote Aug. 21 when it downgraded Hawaiian Electric’s issuer default rating to B from A-plus. S&P Global Ratings assigns a B-minus rating, and Moody’s Investors Service is at Ba3. 

DeVries notes that some institutional investors were required to sell their holdings of Hawaiian Electric bonds after they were cut to junk status. But those who can hang on as the process unfolds may eventually recoup all of their money. 

According to DeVries, “far and away the biggest positive for the regulated operating company corporate bonds are the fact they are pari passu [i.e., on equal footing] to wildfire victims claims in a potential Chapter 11, so with regulators and politicians seeking full victim recovery, corporate bondholders can piggyback on this pari passu status the same way they did in PG&E…. This makes a strong case for an eventual full repayment of principal for those bonds in the event the company files Chapter 11,” he wrote. 

While it’s unclear if the muni bonds would have the same standing, “our legal team’s initial view is the muni bonds have a similar pari passu status to the victims,” he wrote.

Moreover, “as we’ve seen at PG&E, the entire electrical grid in Hawaii needs to be hardened and the company needs to significantly increase wildfire mitigation spending, and both of those are funded by ratepayers and lead to a higher earnings stream, which increases both the debt capacity and equity value of the earnings stream upon Chapter 11 exit,” he said. “To a generalist, this might seem borderline absurd that a company that did so much damage can come out the other side with increased earnings, but this is exactly how the utility business model works and we expect it to 100% hold in Hawaii.

“The takeaway for investors,” DeVries concludes, “is while it is tough to grasp customer bills going up after a devastating fire with numerous deaths, the laws are pretty clear that wildfire mitigation and grid hardening are funded by ratepayers and HE is in need of significant spending on both.”