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Hedge funds battle over PG&E. Bondholders offer billions to take over bankrupt utility

Sacramento Bee

Jul. 18--Two groups of multibillion-dollar hedge funds are fighting over control of PG&E Corp. in a battle with huge implications for California's largest electric utility and the thousands of wildfire victims who hold claims against the bankrupt company.

What had been a quiet tug-of-war turned into a hostile takeover battle late Wednesday. PG&E's major bondholders, in a filing in U.S. Bankruptcy Court, said they're seeking to buy 85 percent of the utility's stock for $19 billion. The effort is part of a larger reorganization proposal that would include paying billions to victims of the 2017 and 2018 wildfires.

"They want to own the company essentially," said Michael Wara, a Stanford University law professor who has been advising Gov. Gavin Newsom on wildfire issues.

PG&E's existing shareholders, led by a competing group of hedge funds, are sure to fight the plan, as they would see their holdings significantly dwindle in value if the bondholders succeed in gaining control.

PG&E is expected to submit its own reorganization proposal in August. Any plan for reorganizing PG&E would need the approval of the company's creditors, the bankruptcy judge and the California Public Utilities Commission.

Asked about the bondholders' plan, the company said it's "committed to working together with our stakeholders through the Chapter 11 (bankruptcy) process to fairly and expeditiously resolve our liabilities resulting from the 2017 and 2018 Northern California wildfires, develop a more sustainable business model and continue delivering safe and reliable service. We can assure our customers and communities that we are looking at all options when it comes to working with the Governor, the CPUC and all stakeholders."

PG&E was driven into bankruptcy under the weight of an estimated $30 billion in liabilities from the 2017 and 2018 wildfires. The bondholders' takeover attempt reflects the belief on Wall Street that a well-run PG&E, once it clears up its liabilities, could be a profit machine.

"They're buying an asset that has some debts, maybe needs some significant repairs," Wara said. "They feel they can take the dust off it ... and have something that's much more valuable than what they paid for it."

According to a "commitment letter" they've filed, the bondholders could increase their investment to as high as $20 billion in exchange for 95 percent control of the company's stock. They would also borrow billions of dollars for a total package of around $30 billion.

Much of the money would go to paying existing wildfire claims, and to contribute PG&E's share of a new insurance fund created by the Legislature to deal with future wildfire costs.

The commitment letter builds on a proposal outlined last month by the bondholders in which they offered to pay $16 billion to $18 billion to victims of last November's Camp Fire in Paradise and the wine country fires of 2017. Victims' advocates have said they want more money but have called the bondholders' offer promising.

Hedge funds are partnerships generally limited to ultra-wealthy investors. The bondholders' group, owed roughly $10 billion in total, are led by a dozen major Wall Street investors such as Apollo Global Management, Pimco and Elliott Management.

Bondholders are lenders, while stockholders actually own the company. The group competing with the bondholders consists of three hedge funds that own a combined 10 percent of PG&E's stock -- Abrams Capital, Knighthead Capital and Redwood Capital. They have become influential players in the company's operations. In April they played a big role in installing Bill Johnson, the former head of the Tennessee Valley Authority, as chief executive of PG&E. Their stock is worth just under $1 billion.

While the fight is shaping up as a duel between billionaires, Jared Ellias, a bankruptcy expert at UC Hastings College of Law in San Francisco, said there's a significant difference in the two groups' plans for PG&E: The bondholders want to pay the old wildfire claims by injecting new capital into the company. PG&E's management wants to take on new debt, a move that Ellias said could "weaken the company and ... make a return to bankruptcy court in the future more likely."

The bondholders' group gained something of an upper hand when Newsom last Friday signed AB 1054. The law creates a $21 billion insurance fund to pay future wildfire claims, financed equally by shareholders and ratepayers of PG&E and the other two big investor-owned utilities.

The law doesn't cover existing fire claims -- and lawmakers disregarded PG&E's plea for an amendment that would have allowed the utility to borrow billions to pay the 2017-18 fire liabilities, with the debt being repaid out of future profits.

PG&E argued that the plan would create a quick way to get money to fire victims. Yet Ellias, the bankruptcy expert, said the plan also benefited existing PG&E shareholders. Although they'd forego some future profits, they'd still keep control of the company.

Newsom told Bloomberg news last week that he doesn't support PG&E's proposal. But the utility plans to revive the proposal when lawmakers return from their summer recess, Bloomberg reported.

The bondholders group, which lobbied lawmakers and Newsom's office, argued that PG&E's borrowing plan would load the company up with new debt and weaken its finances. With PG&E's proposal dead, at least for the time being, that creates an opening of sorts for the bondholders to press ahead with their plan to pull the utility out of bankruptcy.

The first test of the bondholders' plan comes next Wednesday, when they'll ask Bankruptcy Judge Dennis Montali for permission to circulate their takeover offer among creditors. Normally, PG&E would have exclusive right to submit the first reorganization plan.


(c)2019 The Sacramento Bee (Sacramento, Calif.)

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