utility bond

Also found in: Dictionary, Thesaurus.

Utility Bond

A long-term bond issued by a utility company. Because utility companies have very large capital expenditures (they must build expensive infrastructure to provide their services), they use utility bonds to finance many of their projects. See also: Utilities sector.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

utility bond

A long-term debt security that is issued by a utility.
Please compare the risk and return on utility bonds vis-á-vis risk and return on industrial bonds.

Utility bonds, like industrial bonds, range the full spectrum with regard to credit quality. Some utility companies have been able to successfully overcome more difficult times associated with bringing large construction projects into their ratepayers' rate base, thus enabling the companies to pass on to these ratepayers the costs of constructing the projects. Other companies have been forced to pass some or all of these costs on to their stockholders, meaning that these companies' earnings have been hurt severely. (The harm to earnings, of course, also adversely affects the utilities' bondholders because these companies' financial ratios—that is, interest-coverage ratios and debt to equity ratios—are reduced and credit rating agencies are likely to reduce credit ratings as a result. Lower credit ratings translate into higher bond yields and lower bond prices for bondholders.) This is an extremely abbreviated and simplistic explanation of why utility bonds at one time traded at relatively wide yield spreads to industrial bonds. The utility companies' financial ratios were influenced by political factors—such as whether the elected public utility commissioners would permit their reelection chances to be harmed by passing on unpopular rate increases to those same ratepayers who elected them—in addition to all the other factors that were almost beyond the control of the utilities, for example, high interest costs, energy conservation efforts, and environmental concerns. These factors all contributed to the market's perception of greater risk in the utility industry. Some of the factors have changed; others have been overcome by time, as projects have been completed and put into the rate bases of the utility companies of the nation. Still other very positive trends have occurred (such as high interest costs having been reduced through refinancing at lower interest costs). Now we observe that many utility companies are becoming cash cows. The excess cash flows generated by some of them have enabled them to buy companies in nonregulated industries, thus reducing their vulnerability to political influences and allowing them to participate in more growth-oriented businesses. In short, in many cases utility companies are turning the corner on their past problems, and their bonds are trading more and more like industrial bonds in those selected cases.

Stephanie G. Bigwood, CFP, ChFC, CSA, Assistant Vice President, Lombard Securities, Incorporated, Baltimore, MD
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
Mentioned in ?
References in periodicals archive ?
The market value of long-term debt and preferred stock is derived by dividing long-term debt interest payments and preferred dividends by the yield on public utility bonds and preferred stock, respectively.
Among revenue bonds, Conning's Mansour shares Johnson's affinity for utility bonds, particularly power, water and sewer utilities, but is "a little cautious on health care as a sector," Mansour said.
The trend by investors to seek alternatives to utility bonds may continue to push demand for mortgage bonds higher until government lawmakers pass a measure which would compensate victims of the nuclear disaster, said BNP's Nogawa.
Katz, "The Differential Effects of Bond Rating Changes Among Industrial and Public Utility Bonds by Maturity," Journal of Business (April 1976), pp.
Lafayette Life, the 10th largest life insurer in indiana, keeps about 90 percent of its investments in first mortgage utility bonds and in AAA-rated mortgage-backed securities, Poxon says.
BANKING AND CREDIT NEWS-4 February 2010-S&P corrects Harris County Municipal Utility bonds ratings(C)1994-2010 M2 COMMUNICATIONS http://www.m2.com
To compensate investors for event risk, yields on investment-grade industrial bonds rose relative to yields on high-grade utility bonds. After the RJR-Nabisco buyout proposal in late 1988 dispelled the notion that bonds of very large industrial corporations were free of event risk, investors stepped up their demands for stronger bond covenants for protection against that risk, and several issuers have found it worthwhile to comply.

Full browser ?