We expect 10-15bps compression in SRE 5.5 2033s vs NEE 8-9Y issues after recent underperformance given SRE’s strong BBB credit profile and superior technical backdrop in the issue.
1. Buy Sempra HoldCo 5.55 2033 (+128g $100px) vs Sell NEE 5.05 2033 (+105g $98px) ... Pick up 23bp, give $2, move down 1 ratings notch.
2. Buy Sempra HoldCo 5.55 2033 (+128g $100px) vs NEE 5 2032s (+96g $98px) ... Pick up 34bp, give $2, extend 1Y, move down 1 ratings notch.
Considerations:
- SRE (Baa2/BBB/BBB+) is trading widest to NEE (Baa1/BBB+/A-) at the 9Y area of the curve since August 2023. In January 2024, the two bonds actually traded flat on a G-sprd basis. We see FV at SRE +10-15bp.
- SRE HoldCo technicals are superior to NEE in FY24. NEE has ~$3.0+ left in HoldCo issuance, while SRE just ~$1.0bn. Expect supply to weigh on NEE driving convergence in spreads by 1H.
- SRE is unlikely to issue from the HoldCo in the near term following its SoCalGas 30Y FMB and SRE jr. subordinated issues this week. Fundamentally, SRE is a strong BBB credit. FFO/debt of 17% lags NEE by just 100bps. The CA regulatory environment is improving, though at times challenging, and SRE has recently announced onshore wind projects which will be well-received by ESG sensitive regulators. SRE’s regulated utility business comprises ~75-80% of its total earnings base (Oncor T&D, SDG&E, SoCalGas), while the remainder comes from its from LNG export projects (SIP, IEnova), which have secular tailwinds to pair.