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PG & E has a plan to get out of bankruptcy and a lot of convincing to do



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Photograph of David Paul Morris / Bloomberg


Pacific Gas & Electric

(symbol: PCG) has filed a reorganization plan and five banks are confident they can finance its exit from bankruptcy. From now on, it only remains for the hedge funds, the regulators and the victims of the forest fires to cooperate.

This could be a difficult task, at least as part of his current plan. Certain provisions of the plan may be rejected by investor groups who opposed the California electric utility (and its shareholders) earlier in the bankruptcy process. This matters because any plan will have to be approved by forest fire victims, shareholders and regulators, or even bondholders.

Most important
PG & E

The government's plan provides a compensation cap of nearly $ 18 billion for forest fire victims and insurance claim holders. This amount will likely be considered insufficient by Californians who have been affected by the catastrophic fires that have killed more than 100 people and burned more than 200,000 acres in the past two years. The proposal would also pay victims with a trust, effectively preventing them from appearing after the reorganized corporation for further damages.

Read more: PG & E will be able to manage its own reorganization, the rules of the judges. But 1 big risk remains.

Victims of forest fires received the same treatment in a draft reorganization plan filed by PG & E bondholders, including Pimco and Elliott Management, earlier this year. This proposal has capped payments between $ 16 and $ 18.4 billion, and created a trust for these assets.

The similarities between the plans of the two groups stop there. The bondholders 'plan diluted the current shareholders' interest by approximately 90% and left the creditors who owned most of the company, among other differences.

This plan of bondholders was rejected by the court last month. And the same day, Judge Dennis Montali decided to allow the victims of the fire to continue their jury trial in a state court against PG & E. They will challenge the finding of a public body that says public service did not cause the second-worst forest fire in California's history. Notably, even this group includes money from hedge funds. The Baupost Group is one of the leading owners of insurance claims.

About 51% of PG & E's shares are owned by hedge funds such as Abrams Capital Management and Knighthead Capital, which are the main sources of support funding in the restructuring plan tabled by PG & E this week.

Under this plan, payments to victims of wildfires would be funded with a new contribution of up to $ 14 billion. The format of this share offering would, however, vary depending on the implicit valuation of the new stock.

This plan would be supported by a group of investors who agree to buy the shares, provided that the company does not cause catastrophic fires this year. In its paper, PG & E included letters from Abrams Capital Management and Knighthead Capital pledging to support $ 1.5 billion in financing, and announced that it would find investors to support $ 12.5 billion remaining by November 7.

Investors may not need to provide all of the $ 14 billion in promised money, however. For example, if the company issues a debt of more than $ 7 billion, the additional debt will account for some of that $ 14 billion total.

And in a few cases, the company could sell certain shares to the public or as part of a rights offering. The method they would choose would depend on the implicit ratio of the price / earnings ratio, or P / E ratio, of the shares that will be sold.

The company has also included letters of
Barclays
,
Citigroup
,
Goldman Sachs
,
JPMorgan Chase

and
Morgan Stanley

who has expressed confidence in PG & E's ability to access approximately $ 35 billion to $ 40 billion in financing out of bankruptcy.

There could be disagreements on who will also vote on the agreement. Prior to implementation, the plan must be approved by the company's shareholders and the plaintiffs. (The bankruptcy judge and the company's main regulator, the California Public Utilities Commission or CPUC, must also approve any exit agreement.)

PG & E says that it will fully repay the bondholders, which would mean they will not have the right to vote.

But the company wants to pay interest accrued at a rate of 2.6%, while coupons on these bonds of $ 17.5 billion range from 3.3% to 6.4%, according to CreditSights. The lower rate would also apply to $ 3.3 billion of revolving bank debt and $ 600 million of unsecured term loans that PG & E had filed for bankruptcy filings.

"We expect creditors to oppose the plan," say CreditSights analysts. "We do not believe that the debtors' plan, in its current form, will remain unchanged without confirmation, but we believe that its terms are an important baseline for future negotiations."

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com


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