Money talks, but the big question for PG&E Corp. next week is how closely the bankruptcy judge is listening.
The battle for the future of the wildfire-prone California utility intensified this week with a fusillade of court filings. To recap, PG&E has an exclusive period until late September to file a proposal to get out of chapter 11. Late last month, though, a group of unsecured bondholders led by Elliott Management Corp., Pacific Investment Management Co., and Davidson Kempner Capital Management called on Judge Dennis Montali to end PG&E’s exclusivity and let the committee begin open negotiations for a plan of its own. Consumer and labor groups, among others, also called for the judge to end exclusivity. Now PG&E has filed its rebuttal, asking the judge to deny the motion. Separately, a group holding subrogated insurance claims filed its own rebuttal, calling on the judge to either maintain current exclusivity or, if he ends it, open it up to all competing plans. A hearing is scheduled for Wednesday.
PG&E blasts the bondholders, claiming they have dangled a big theoretical check in public to try to “hijack” the company’s reorganization. Ending exclusivity is unusual, and PG&E says the bondholders’ plan isn’t strong enough to warrant it. Indeed, the very fact that the bondholders filed an amended proposal with some more details – on Thursday, the day PG&E was due to make its own filing, helpfully enough – signals the proposal lacks credibility, PG&E says. PG&E also claims the fact that the bondholders only minimally impair their own unsecured paper – and flip it into secured bonds, thereby likely raising its value upon exit from chapter 11 – shows this is a bad-faith attempt to simply wrest control of the company for maximum gain. The subrogated-claims holders echoed that last point in their own filing.
This argument may persuade Judge Montali to give PG&E more time, but it has holes of its own. The bondholders are clearly not in the business of altruism; they’re profit-making concerns after all, just like the equity holders in PG&E pushing for exclusivity to be maintained. Avoiding being seen as rapacious vultures is something for which all such parties must strive. In this respect, the bondholders’ proposal has some questionable optics. These include taking hundreds of millions of dollars of commitment fees for arranging new financing and a pricey 7.5% coupon envisaged for the new unsecured notes. Plus, of course, their plan would net them 85%-95% ownership of the reorganized company.
Yet the judge may also take the view that (a) every party seeks the best deal for itself and (b) all such terms are ultimately both tactical and negotiable. Even the proposed bond impairment can be seen as an opening gambit, not set in stone.
Above all, the $19 to $20 billion of new equity outlined in the bondholder proposal is hard to ignore, especially as there is no other number competing with it yet. As I wrote here, the judge has to ensure PG&E exits chapter 11 with as much of a financial cushion as possible to deal with California’s growing climate-change related risk of large wildfires. Fresh money is fresh money, even if it comes at the expense of existing shareholders – which is hardly unusual in a bankruptcy anyway.
And this plan certainly would come at existing shareholders’ expense. Even using the more moderate $19 billion proposal, the implied stock price for PG&E is just $6.34, a 65% discount to the current level. A back-of-the-envelope valuation of a post-chapter 11 PG&E implies a haircut of almost half for existing shareholders versus the current market capitalization.(1)
One interesting aspect of the PG&E filing is that it says the $31 billion or so of funding outlined in the bondholders’ term sheet isn’t adequate versus estimated obligations of almost $35 billion. This is designed to portray the proposal as not serious or worthy of terminating exclusivity. Yet the gap of less than $4 billion, or 12%, could also be read as being eminently bridgeable for deep-pocketed institutions, especially considering these numbers are effectively a first pass before the opposing parties have really talked.
This also highlights the other elephant in the courtroom: the size of the claims themselves. The subrogation committee’s objection to the bondholders’ plan rests largely on the position that it doesn’t come anywhere near to adequately compensating victims of the Tubbs Fire of 2017. This is an especially contentious point because CalFire, the state’s Department of Forestry and Fire Protection, determined that fire was likely caused by privately owned electrical equipment, rather than PG&E’s. While many took this as meaning PG&E would avoid paying billions of dollars of Tubbs claims, the subrogation committee states flatly “CalFire got it wrong.” This echoes a similar argument made by the committee of tort claimants, which favors ending PG&E’s exclusivity but doesn’t back the bondholder proposal.
At its extreme, Tubbs represents a swing factor in the liabilities facing PG&E that is bigger than the current market cap. That would present a complication for bondholders and equity-holders alike; but the bottom line is that, alongside PG&E’s claim of a funding mismatch, the argument for an infusion of fresh equity only gets stronger. Indeed, the subrogation committee, without giving details, proposes a rights offering. And PG&E’s own proposal talks of “a substantial infusion of cash raised from existing equity holders on market terms or in the capital markets if available on better terms”. PG&E still holds out the prospect of new securitized bonds also playing a role, although there’s little sign thus far of Sacramento having any appetite for backing that.
In the background, the clock is ticking toward the June 2020 deadline to get PG&E out of bankruptcy so it can participate in California’s new wildfire fund. The fact that legislation was only passed recently may strengthen PG&E’s case that it’s making progress but needs more time. Even so, the existence of a competing proposal with actual numbers can’t be ignored. And whatever the judge decides on Wednesday, this latest skirmish should remind investors about the scale of PG&E’s potential liabilities – and the corresponding risk of substantial dilution.
(1) This assumes a regulatedasset base of $40 billion with a 52% equity component;an allowed return on equity of 10.9%;a deduction of PG&E’s upfront wildfire mitigation costs under California’s recently-enacted AB 1054; and an earnings multiple of 17 times.
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Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.
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