PG&E Plan to Pay Insurance Claims in Cash Hurts Bankruptcy Talks
November 08 2019 - 9:45AM
Dow Jones News
By Andrew Scurria, Peg Brickley and Erin Ailworth
An $11 billion settlement of insurance claims tied to PG&E
Corp.'s alleged responsibility for California wildfires is emerging
as an impediment to a potentially broader deal to end the utility's
bankruptcy, according to people familiar with the matter.
The proposed payoff to hedge funds and insurance companies is
coming under pressure as victims of the wildfires bargaining for
better treatment by PG&E, the people said.
In September, the company signed a settlement proposal that
would pay $11 billion in cash compensation for what insurers paid
out for damages caused by wildfires linked to PG&E
equipment.
If approved by the court overseeing PG&E's bankruptcy, the
deal could tie up much of the free cash the company will have as it
exits bankruptcy. Some of the cash would go to insurance carriers
themselves, repaying insured losses stemming from the wildfires.
Much of it would go to hedge funds that bought insurers' claims
against PG&E at discounts, usually paying less than 50% of the
face value.
And, people who lost homes and loved ones to blazes that have
been linked to the utility's aged equipment are more likely to
receive shares in the restructured company as compensation, rather
than cash.
That prospect is not sitting well with lawyers for fire victims,
who already are being pressured to take less than the $54 billion
they believe their clients are owed. Market participants are also
questioning whether PG&E can afford to stick with the cash
payout for claims when the utility may be swamped with yet more
wildfire damages.
Prices on insurance claims climbed after the insurance
settlement but have since softened. The market now believes the
insurance settlement, which requires court approval, is at "a high
degree of risk of becoming unsustainable," said Vladimir Jelisavcic
of claims-trading platform Cherokee Acquisition.
Fire victims, bondholders, PG&E and its owners are
negotiating behind closed doors under the supervision of a mediator
who is pushing for a broad consensus on the best way forward.
PG&E's opening offer to fire victims is $8.4 billion, an
amount that includes $7.5 billion for individual wildfire
claimants, and $900 million for emergency services providers. A
rival chapter 11 exit strategy put forth by bondholders and
wildfire victims themselves, provides for fire damage payments of
$13.5 billion, with payment in stock and cash.
In a regulatory filing on Thursday, PG&E acknowledged that
settlement talks may result in a revised plan that offers fire
victims an amount closer to the $13.5 billion bondholders are
offering.
The sticking point in negotiations is the form of payment,
according to people with knowledge of the talks.
The company has said the insurance settlement represents a
recovery of about 55% on insurance claims. Critics of the deal
disagree, and are pointing to payout figures that indicate
insurers, and investors that bought insurance claims at a discount,
are in for a relative windfall if the settlement is approved.
With holdings of more than $6 billion, Seth Klarman's Baupost
Group is the largest holder of insurance claims. The Boston hedge
fund is also one of PG&E's largest shareholders, owning 24.5
million shares.
It's not known how much Baupost paid, but the data available
indicate the hedge fund could make hundreds of millions of dollars
in profit from its PG&E insurance claims, more than enough to
offset the losses it has taken on the utility's flagging stock.
In March, when Baupost reported its holdings in court filings,
its stake in PG&E's stock was worth nearly $467 million. At
Thursday's closing price, Baupost's stock in PG&E was worth
less than $147.5 million.
Baupost declined to comment on the insurance settlement. Judge
Dennis Montali is scheduled to hold a hearing on it next week in
the U.S. Bankruptcy Court in San Francisco.
The insurance settlement has been controversial from the start.
Wildfire claimants argued it is unwise for PG&E to bind itself
to an $11 billion cash payout without knowing what the full amount
of damages stemming from the blazes will be.
Baupost has said in court papers the proposal helps wildfire
claimants and would guard against PG&E's insolvency by nearly
halving a potential $20 billion insurance claim.
Failure to get to a chapter 11 plan agreement with wildfire
claimants could be disastrous for PG&E, which faces a June 30,
2020, deadline to exit bankruptcy if it wants to participate in a
state wildfire fund that would cushion it against future
losses.
--Erin Ailworth contributed to this article.
Write to Andrew Scurria at Andrew.Scurria@wsj.com and Peg
Brickley at peg.brickley@wsj.com
(END) Dow Jones Newswires
November 08, 2019 09:30 ET (14:30 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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