Municipals end firmer again; privatization of Long Island Power might be bad idea, Fitch says

By Sheri Kasprzak

New York, Jan. 8 - Municipals were firmer again on Tuesday as secondary action picked up and new issues were seen doing well, market sources said.

Firmer Treasuries also gave munis a boost, said traders.

"Treasuries are firming, and for the past couple of weeks, it's been Treasuries that have kept us down. Supply is certainly partly to blame, but Treasuries have been weighing us somewhat," a trader said.

Another trader noted that some solid trades early in the session were giving munis a hand as well. Among the triple-A names seen trading higher were Georgia; Wake County, N.C.; and Fairfax County, Va.

Additionally, the trader said lower-rated names like California were also seen trading better.

LIPA privatization discussed

Meanwhile, the Long Island Power Authority could be privatized in the wake of Hurricane Sandy. It's not the first time the authority has discussed selling to a private energy company. The authority considered doing the same thing in 2011, but the idea was widely panned.

On Monday, the Moreland Commission recommended privatizing LIPA. The commission was created by New York Gov. Andrew Cuomo after the authority, along with Consolidated Edison and other utilities, failed to get power back to New York residents in a timely manner following Hurricane Sandy.

Expense may outweigh benefits

Fitch Ratings said Tuesday that privatization would be expensive and may not result in the projected ratepayer benefits.

"In our view, the primary challenge to privatizing LIPA remains mitigating the higher cost of capital that would likely result from refinancing or defeasing the utility's more than $6.8 billion of outstanding debt and addressing the authority's other obligations," said Dennis Pidherny, managing director with Fitch.

"LIPA's high debt burden and nominally high electric rates remain a key credit concern. Debt to funds available for debt service was 19.0x for fiscal 2011, compared to Fitch's rating category media of 8.1x. Although some reduction in operating costs may be attainable under privatization, other initiatives, including reductions in property tax payments (or payments in lieu of taxes) are likely to be politically unpopular. Fitch therefore believes that total cost reductions would be more than offset by higher capital costs of new debt and equity associated with privatization, absent some broader plan to reduce LIPA's debt burden. While it serves mainly residential customers in some of the wealthiest counties in the country, the current political environment seems unlikely to support privatization-driven rate increases."

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