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Hawaiian Electric Preferreds Slammed

I’m certain most of you are aware that the $20/share Hawaiian Electric preferred shares took a real beating the last few days as blame for (or blame for contribution to) the Maui fire came home to roost. This is a replay of the California blame game from a few years ago – I wouldn’t touch these shares with a 10′ pole. There is an awful lot of emotional pain on Maui right now and this is going to get very ugly and trying to take advantage of low prices is a very bad idea (in my opinion) – over the course of years these could go to zero.

Equities are tumbling this morning – and as we all know a soft start doesn’t mean a down day as the buy the dip folks are out there. The weakness apparently stemming from weakness in the Chinese economy which has lead China to cut interest rates to try to stimulate. This is just 1 more arrow in the quiver of the ‘here comes the recession’ club.

Interest rates are moving higher this morning with the 10 year treasury yield is now around 4.23%. As I noted in the Monday Morning Kickoff yesterday the average $25/share preferred and/or baby bond has barely moved in the last 8 weeks–I feel fortunate. Personally my portfolio values have backed off a tiny amount in the last month – but it is a tiny amount, maybe 1/4%-destined to worsen if these rate increases don’t slow down a bit.

Oil prices remain elevated and near the high of the year–although overnight west Texas has backed off a buck. When I fill my vehicle with gas and it cost $70 it is painful to a ‘cheapskate’ like me. I am glad that I don’t have a giant sized pickup. Recall in June 2022 west Texas was $106 so we aren’t even close to that high–ouch.

I continue to do nothing – no buying or selling, but now I am looking at some potential buys based on ‘yield to maturity’. I think there are some opportunities out there for over 8% on some issues that are in my ‘wheelhouse’ of risk. I plan to write on 1 or 2 of these yet this week. Checking CD rates this morning I see JP Morgan is offering 5.55% on a 1 year callable–not terrible, but unlikely to move me much since my cash position is meager.

56 thoughts on “Hawaiian Electric Preferreds Slammed”

  1. Interesting developments happening with this today. HE claiming they had de-energized their lines and are not responsible for the fire that engulfed Lahaina. They have stated that they might counter sue the County. Common rising quickly on the news, preferred’s more muted but rising.
    Sidenote opinion: Its nice to see them fighting back against the vultures and zealots. Last week I bought a bank and got an electric utility free. Hope it works out.

  2. HE…. The company reportedly is in discussions over strategies it can pursue and to determine whether it needs to hire legal and financial advisers, with the costs of defending and resolving so many claims adding up just as access to financing is being threatened.

    Some of Hawaiian Electric’s (HE) creditors also have been speaking to attorneys with restructuring expertise, seeking to understand the risks to their investments, according to the report.

    The company’s bonds due 2037 have plummeted since the fires, changing hands at $0.69 on the dollar Wednesday, down from $0.95 last week; its stock has plunged 59% since August 10.

  3. Lahaina resident on the news this AM saying a power line fell in his yard- sparking a fire….

  4. I saw this article from a few years ago about an arsonist who started a big fire on Maui back in 2019. He has also been arrested for many other serious charges but keeps getting let out on bail. I wonder if he may be responsible for starting this one as well: https://www.mauinews.com/news/local-news/2021/09/man-indicted-for-starting-massive-wildfire/

  5. Discussion of the HE situation in Bloomberg
    – Short term liquidity risk if lenders get nervous
    – Small company with big damages, 2.4 billion cap vs 5 billion damages
    – Possibly insufficient insurance coverage, one estimate under 1 billion.
    – No power cutoff
    – Legal standard is higher than CA
    – Power cutoff would have turned off firefighter water pumps.

    Hawaiian Electric’s Future in Doubt After $1 Billion Meltdown

    “If there was negligence, I would expect all options, including bankruptcy for Maui Electric, to be on the table,” said (the CEO ), … of utility investor Reaves Asset Management.

    “The company’s insurance coverage is likely under $1 billion, Wells Fargo utility analyst …said… It’s unclear if the parent company could “ring-fence” potential liabilities within its Maui Electric subsidiary, …. ”

    Damages from the tragedy have so far reached more than $5.5 billion, according to federal estimates, an amount that dwarfs Hawaiian Electric’s market capitalization of about $2.4 billion as of Monday’s close.

    “Given the size of the company, I don’t know how they would be able to account for this if they are found negligent or imprudent,” said …a utility analyst for Guggenheim Securities. “It’s hard to see the company emerging from this tragedy in its current form.”

    My spin: Not a day trader, but I can see the inevitable dead cat bounce off a bottom, followed by another sharp drop after HE discloses insufficient insurance limits – or that cost-saving corporate favorite, “self-insurance.” Longer term, IMHO quite a bit of costly upgrading of their grid will be required. Just watching from the sidelines now, wanting to hear their insurance coverage limits.


    1. “It’s unclear if the parent company could “ring-fence” potential liabilities within its Maui Electric subsidiary”

      Generally, you can’t ring fence if there is negligence or fraud. Insurance coverage could also be impacted if there is gross negligence.

      1. PCG early on toyed with this idea when facing their bankruptcy risk. But ultimately decided it wasnt going to benefit or couldnt. They are seperate entities and various companies in the past have done this before. But I am not knowledgeable in such areas and so for me, I just have to assume they cant or will not be able to just like PCG did with PG&E.

      2. If insurance policy limit is correct at $1B and damages are verified at >$5B, then HE only needs 20% share of liability to exhaust policy.

        It’s probably a good guess here that instead of incurring a large bill for defense litigation, that the insurer pays the policy limit as soon as practical and exits.

        Hard to imagine the HE board, if it still exists down the road, authorizing dividends of any form for many years. But then here’s the twist…how far invested are HI public employee pensions invested in HE. Many hurdles and much deal-making ahead.

      3. There’s an ongoing discussion in legal circles about spinning off costly legal liabilities into an empty subsidiary / shell corp. then immediately bankrupting it. (I understand it’s nicknamed “The Texas Two Step.” )

        The venerable Johnson and Johnson has been trying to spin off its liabilities for talc-cancer lawsuits into a separate subsidiary which it will then bankrupt, leaving the plaintiffs with little recourse beyond the shell and the J&J shareholders with no further liability. As of this week, they were still arguing about it. Not saying it would work here, HE is a regulated business, just saying smart lawyers can do amazing things.

        1. J&J is assuming all of the Talc liabilities in the US. The subsidiary (split-off) is handling the rest of the liabilities for the rest of the world which is estimated to be a much smaller risk.

    2. Fantastic, foresightful policy, budgeting for infrastructure and policing by experts for real needs of citizens:
      “The State of Hawaii Public Utilities Commission was established in 1913. The Commission’s mission is to serve the public, by ensuring essential utility services are delivered to consumers in a safe, reliable, economical, and environmentally sound manner.
      As of fiscal year 2022, the Commission regulates 1,845 entities, which includes all chartered, franchised, certificated, and registered public utility companies that provide electricity, gas, telecommunications, private water and sewage, and motor and water carrier transportation services in the State. ”
      The real proof is in the fact. Nobody really knows what they are doing, imcompotent, but talking a good game. It’s the SAME …EVERYWHERE.
      Who’s flying the plane?

  6. I’m playing it very conservative here into the EOY. This morning I purchased a decent sized position in the 3.000% coupon Treasury maturing 7/31/24 for 5.35%. Close to a one year CD in my book that even pays me 3% every 6 months. My treasury ladder extends out to next July now though I did take a smaller position in the 10/31/24 maturity (4.375% coupon) for a 5.2% yield. Half of all my positions are in treasuries now with maturities almost on a regular monthly basis thru next July. I’ll decide what to do with proceeds as they mature given market conditions.

    1. “Emergency” cash goes to eTrade’s premium savings account that pays 4.25% currently. My PNC bank account only has a pittance in savings there as they pay nothing (0.04%).

  7. I came very close to trying to acquire a small number of these shares before the fire happened. I guess I lucked out there.

  8. I’ll chirp in. I lived and travel extensively all over the West. Now the ideal is for entire towns to thin, pile, burn with heavy snows and it has become a moral obligation to keep a defensible perimeter for all who share the environment. This is most evident in an area like Silverthorne where I70 passes through or Sunshine Canyon in Boulder and everybody can see the work, ESP after an Act of God (I don’t know why we’re still blaming God) like Pine Beetle, small killing low fires leaving standing dead; not unlike Wind, Lightning and Hurricane amplifying actions.
    Let’s face it we’re All looking for an object to BLAME instead of recognizing risks realistically, we want to party and travel with our money instead of being prudent as a group. We can act like a community of Sane Group Action Monkeys which is what we are REALLY good at, and THAT action is the REAL Act of God, but we choose to look for enemies instead. Welcome to our endemic mental illness. In school they used to send a report on: Works Well With Others. HAha now.
    As an Investor, gotta stay within a set parameter, like any one company a set % of net worth. This diversification is why I am trying to work with FINRA right now for an unconcentrated portfolio.

    1. People should protect themselves but it also makes sense to spend the time and money hardening infrastructure and implementing safety protocols to prevent wildfires before they happen. Ounce of prevention worth a pound of cure.

      CA utilities have done a good job with this and as a result EIX/SCE was recently upgraded by both Moody’s and Fitch.

      Everyone has to do their part to prevent wildfires and not every utility is acting responsibly.

  9. I’d argue that one’s previous experience (or lack of) in trading these types securities plays into it as well. For instance, many were scared out of PCG after the fires, eliminated dividends and preferred’s. I bought in and received a triple on their common in a very short amount of time while everyone else was worried about the fact that dividends were cut. Junk status and existential risk being arguably at its most dire. I didn’t think the company’s risk was existential so my risk assessment was different than most on that one. No situation is the same, obviously, so no telling what happens to HE, but can say the acquisition of “junk” has made more money for me than any IG issue without it really being close. Will be watching this one closely.

    1. pig pile – I agree generally that some may want to take a flyer at some very low price, but generally the most conservative are best just leaving it alone. I would consider a ‘flyer’ at some point in time, but I don’t know at what level that is nor how many years in the future.

      1. For sure, not for the risk averse nor the folks whose risk assessment tells them not worth it. As my grandfather said, don’t bet your bus home money at the black jack table.

      2. Tim, I am not worried about PCG except for the homeless starting fires. The local , city, state forestry and the fed are all coordinated now. Not hardly a day goes by without hearing a siren or seeing a fire truck. Even PG &E has loaned them an attack helicopter to jump on a fire at first report. I have some low-ball bids in for the preferred when anxious sellers bail

  10. Moody’s downgrades Hawaiian Holdings’ CFR to B2; outlook negative

    New York, August 14, 2023 — Moody’s Investors Service (“Moody’s”) downgraded its ratings of Hawaiian Holdings, Inc. (“Hawaiian”), including the corporate family rating (CFR) to B2 from B1 and probability of default rating (PDR) to B2-PD from B1-PD. Moody’s also downgraded the rating on subsidiary Hawaiian Airlines, Inc.’s Series 2013-1 Class A Enhanced Equipment Trust Certificates (“EETC”) to B1 from Ba3. Moody’s affirmed the Ba3 rating assigned to HawaiianMiles Loyalty, Ltd.’s $1.2 billion of senior notes secured by the company’s HawaiianMiles loyalty program and its brand intellectual property (“Notes”). The speculative grade liquidity rating was lowered to SGL-2 from SGL-1. The ratings outlook was changed to negative from stable.

    “The ratings downgrades reflect the inability to restore operating margins and cash flow to near their respective pre-pandemic levels,” said Moody’s Senior Vice President, Jonathan Root. Moody’s expects an operating margin near negative two percent in 2023, which compares to 12.5% in 2019. Cash flow from operations will reach about $100 million in 2023, well below almost $500 million in 2019. “The shortfall in cash generation will weigh on Hawaiian’s liquidity if it is unable to achieve a strong positive inflection in 2024,” said Root. Moody’s believes that recovery of Hawaiian’s cash generation is being hampered by Southwest Airlines’ lower pricing on inter-island flights. Hawaiian is likely booking materially lower fares on its inter-island services as compared to before Southwest’s entry. Moody’s estimates the annual impact to Hawaiian’s operating cash generation is about $200 million. The destruction from the Maui fires this past week may prove to be another barrier to improving cash generation in upcoming months. However, vacationers continuing to choose Hawaii, though possibly foregoing a visit to Maui on their next trip, would help mitigate such pressure on cash generation….

  11. Gas this morning at Costco ( California central coast) $4.99 a gallon. About $50.00 for a half tank in my car.

    1. My next door neighbor moved from your area a year or so ago. He’s now paying about a buck and a half less than you are.

      A glance at current figures shows much of California is losing population. Of course, the Texas coast is not nearly as pretty. Neither is Arizona’s and yet… 😉


      1. camroc,
        It is beautiful country here, close to the beach and mountains, temperature mostly in the 70’s all summer, but we pay dearly to live here, no doubt about it. If I didn’t own my home outright I doubt I could afford to remain here with the cost of homes and rents being so high here now. luckily retiring at the end of October, the daily 50 mile round trip commute to the base will be no more (although it isn’t bad, mostly through the hills and countryside with a slight ocean view in a couple places), hoping to use my bike and my legs more than my car then 🙂

        1. Funny Bill, the bike is on my agenda too. City has a 2-1/2 mile walking and biking trail from one end of town to the other. But again hearing more people retiring. My salesman at my local hardware store called to say goodbye had a 1/2 hour left before he hit the door. His wife and him moving to Asheville North Carolina to be with the daughter and grandkids. Wife told him she was going wether he came or not. Lol

  12. The evidence in the lawsuit looks pretty compelling, although of course, that’s only one side. It will take months before we see what defense HE mounts but it’s pretty clear this isn’t just some frivolous lawsuit. There’s a reasonable chance that power lines did in fact start the fire.

    Similar situation with Pacificorp. In that case, they didn’t even deny starting the 2020 Oregon fire but claimed they acted prudently. They lost the initial lawsuit and there could be more to come from other plaintiffs.

    Is this something specific to Western states or could any utility be hit with lawsuits if their equipment starts a wildfire? As we saw this summer, wildfires can be on the East coast too.

    Ironically, I think the risk is actually pretty low for EIX/SCE since they’ve already done a ton to harden their infrastructure and implement safety protocols. Plus new legislation created a wildfire insurance fund.

  13. With the consequences of the California blame game, the risk of owning utility companies certainly increased. I almost tried to buy some Hawaii Electric preferreds earlier this year. In total hindsight, the illiquid utility preferreds are perhaps the greatest risk of all the utility companies. I own NI-B and am holding. But it is not just Hawaii Electric that I would not own. At this point, I think all the illiquid utility companies need to be considered as having a higher risk. The tragic situation in Maui has hammered this point home to me.

    1. Curious as to why you think illiquid has a connection to any of this? NI basically blew up part of a small town a few years ago, but insurance covered a lot of it. In fact if memory serves, in part that was why NI issued NI-B. Regulatory and environmental issues in relation to state laws in their operating location seems more of the risk factor than how many shares of a certain preferred a company has.

      1. Illiquid preferreds can mean greater volatility on negative headlines. Most illiquid preferreds trade with an illiquidity discount because all other things equal, liquid preferreds are preferable.

        1. That part is a given in specific situations. However if one did have these preferreds they had a chance to get out at market open yesterday. Unlike say the PCG preferreds which are on NYSE and tanked premarket. If you noticed the liquid holding company of HE common cratered quicker out of gate than the preferreds did yesterday. Actually utility illiquids do not trade at a discount. They actually typically trade at a premium which makes them uninvestible now being they yield almost as low as CDs and TBills.

          1. I agree some illiquids don’t trade at a discount which is puzzling. I’m guessing it’s just holders who are asleep at the wheel.

            The bigger less-liquids like WFC-L and USB-A do trade at a consistent discount to their more liquid peers.

      2. Yes, all utility companies face this risk. I owned NI-B when the blast occurred. I was able to liquidate rapidly with no significant loss. Then I repurchased when the risk turned out not to be tangible.

        If a company’s preferred stocks are illiquid that makes the ability to liquidate much more limited. To me, that means you have 2 risk factors versus one.

        1. Steve, NI-B was issued a couple months after the Columbia gas blast. Your concern of owning too many shares in an illiquid issue when a disaster occurs and wanting to sell out quickly is a valid concern. I was misunderstanding your point in your first post.

        1. Lived in that Mass town at the time gas company was forced to sell that division I remember everyone in town getting checks virtually any gas appliance replaced contractors living on cruise ships in Boston. The chaos that day was unbelievable and whole neighborhoods without power and heat for months.

    2. Steve, Much of this discussion may relate to one’s goals. I think many would ignore illiquidity and instead focus on:

      1) quality
      2) price (yield)
      3) call-ability

      Hawaii Electric was rated junk before the fires. That made it a non-starter for many. The yield premium of 0.5% for this junk issue never made sense in any reasonable risk/reward evaluation. I mean – junk “means” junk, and for seen or unseen reasons that rating has now been underscored.

      Illiquidity of the issue is not related to HA Elec’s junk status and existential risk is present for every single company listed on the exchanges. Many illiquids actually have a history that greatly exceeds the age of the average listed company. Heck I’m holding boatloads of them some issues of which are older than me. I’ll continue to acquire on weakness, but only if they continue to meet my criteria for 1-3 above.

      Best to all.

      1. Alpha, As I type the HE preferreds day 2 into trading are still mostly as a group have a lower yield than the PCG preferreds are trading at now. And someone has a bid of $16 out on one of the preferreds. Crazy. If anything it proved illiquidity had the prices too high to begin with pre fire…And should be lower right now, but its been slow getting to where the risk would indicate it should.

        1. Grid:

          You are definitely III’s resident expert on these HE preferreds. The parent company services 5 out of the 6 islands (only Kauai is serviced by its own utility).

          One has to think that HE will survive in some form here even if they are 100% to blame for Maui fires? It is still a $5+ Billion utility.

          Anyway, I threw some money on HAWLL today at $10/share (9.3% yield), as that was the lowest offer price out there for the 7 HE preferreds and has by far the highest trading volume today. First time ever buying the HE preferreds!

          Only 175K shares outstanding for HAWLL, callable only at $21. Already sold half of position at a nice gain when it quickly bounced higher and bid price spiked.

          We’ll see where she goes from here.

          Obviously, with extreme risks comes extreme (potentially) rewards. This is going to be a wild ride….but I love the action. Have you dipped your toes in the Hawaiian waters yet?


          1. Kid, just my opinion, but your really just trying to gamble on volatility benefitting you here. As I type you have on bid ranges from the various (but overall fairly similiar par yields) ranging from in the $10s to $16s and the asks from $12s to $19s. There is no rhymn nor reason for the huge price ranges other than they are what they are. Meanwhile the common is down another 20%. It looks more like dead cat bounce game. The overall trend still seems down for preferreds.
            There will be information vacuum and rumor mill for a long time. Ultimately worst case scenerio a utility could be bankupted and debt and capital all wiped out. All while consumers remain totally unaffected. And PCG case, they very quickly suspended the preferreds and eliminated common dividend way before they entered bankruptcy as the need to protect cash was a big priority before any responsibility was acknowledged. This could easily happen here even if ultimately they have no fault.
            Everything is all speculation now. But just yield wise, even now the risk doesnt appear to be anywhere near the reward. You can get reset preferred yields from ute powerhouses Emera and Fortis around 8% from solid companies. That is higher than what some of these preferreds are trading at now with a $5 billion plus liability cloud hanging over its head. With all the possible scenerios and outcomes accurate price discovery doesnt seem possible.
            Just me only, the prices arent nearly low enough for me to speculate on.

            1. Grid:

              As always thanks for your feedback.

              Whomever is bidding $16.80 today (that bid has been there all day) for the 5% HAWEL preferred (for a yield of 5.95%) almost certainly needs to be drug-tested. My goodness.

              No doubt this is going to be a wild, wild ride.

              1. Kid, It doesnt help a company that goes bankrupt. But HE preferreds are one of the few left that take majority control of the board after a certain amount of quarterly preferreds are not paid. Keep in mind this is the Hawaii Electric board not holding company HE board though. This is not a reason to buy them now for me though.

        2. Grid, NI-B is suddenly down 2.2% to 24.63 on heavy volume as I write. Do you think that drop is in sympathy with HE preferreds or does it have its own issues?

            1. Thanks Grid. Possibly a big fund is liquidationg or reducing sizable position. The utilities preferreds in general are down today, possibly creating a buying opportunity. I have added to my position in Ni-B at 24.50. Had an order at $ 25.01 to add to position in SOCGP but it it did not fill.

            2. Gird, NI-B is a 5-year reset rate. It resets in 7 months at the 5-year treasury + 3.62% in March 2024. No issue with the LIBOR conversion to SOFR. So, the reset rate in today’s world would be about 7.9% for the next 5 years. Dividends are qualified. I am not sure they can get a better rate with a new issue and calling this one on. I cannot imagine they have 500M hanging around to just call this in without issuing a new preferred or baby bond.

              Do you have any views on whether they will be able to call this in?

              1. Unfortunately, I do not. This was issued a few months after the explosion. Capital was going to need to be raised to work through all that. So in part one would need to know if they are keeping this as a permenent capital structure, or if it was a near term bandaide. They have some other $1000 preferreds if memory serves me. EIX issued a lot of reset preferreds after their fire liability, and have periodically crowed about wanting to take them out down the road. Situations and interest rate scenerios can change their plans or even our assumptions. They could even dilute equity to pay it off if they so desired. Utes dont tend to drop as sharply on equity dilutions as other companies.
                But at its present price point, it certainly wouldnt be any cap losses if they did.
                Overall, Im just not too bigly in preferreds now. I did buy a small 500 share lot of the Fortis Series G reset (think ITC transmission, Tucson Electric, Central Hudson in US) at 14.21 today. Allowing for exD in a couple days its around 8.05% going forward on Sept. 1. Im taking the bird in hand since it just reset.
                Everything has its plusses and minusses when evaluating what to buy.

                1. You are correct. Everything has pluses and minuses. I used to own Fortis. I sold it because of the fact that they own Caribbean Utilities and other holdings in the Caribbean. The severity of hurricanes was my concern. Of course, now we have the Canadian wildfires.

                  1. I actually saw NI-B hit 24.40. I threw in a small bid order at that price late, but it didnt hit. I couldnt buy more than 500 shares without having to sell something anyways, so I wasnt too disappointed it missed. Im just not excited on much now anyways.

                  2. Keep in mind most utilities get to request recovery of costs through repairs in natural disasters and storm damage. Some can get it via base rate, others through lower securitized debt issuance (lower rate) that is a separate add on the customer pays off….After seeking it through appropriate commission that approves it….Its not really storms and fires that would hurt a utes long term finances. Its any negligence that could be attached to it.

                    1. Grid, good points. My counter point to that (if it is a counter point at all) is that it isn’t in the regulatory authority’s interest to have a financially weak utility entity responsible for all that you mentioned. I’m not sure if anyone sees it the way I do, but I’ve always felt that California wanted to punish their utility as much as they could without killing it entirely (to include being able to effectively maintain their system in a much more robust manor). This is tough ask for a utility that is scrambling for scraps to be able to do what the state asks. But in the end, each of these cases are different in many ways so there is no telling what will happen.

              2. In early June, NI offered about 750M of 5 and 10 yr notes to repay the NI-PA issue. The Series A was on identical terms to NI-PB except the fixed rate was 5.65% and the reset was 5UST + 2.86 (or thereabouts, I don’t recall exactly) which have been around 7.25% when the Notes were issued. The Notes priced at an average yield of around 5.35.

                So can NI call the deal? Yes, it would appear so, perhaps even without a new preferred or even common issuance. I hold a double position in NI-PB and fully expect to have to replace the issue in my portfolio come March 2024.

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