California Governor Questions $11 Billion PG&E Insurance Deal
November 11 2019 - 9:19AM
Dow Jones News
By Peg Brickley
California Gov. Gavin Newsom questioned PG&E Corp.'s $11
billion settlement proposal for insurance losses tied to wildfires
and said it could derail the utility's bankruptcy exit
strategy.
In a court filing on Saturday, the Democratic governor raised
several objections to the proposed deal with insurance creditors
after it emerged as a sticking point in negotiations to resolve
PG&E's massive debts and wildfire liabilities.
If the company can't resolve an impasse over the insurance
settlement and line up wide support for an exit from chapter 11,
Mr. Newsom's lawyers said the state government "will present its
own plan" to resolve the bankruptcy.
His threat marked the second time in less than a month that
California's governor has raised the possibility of taking
PG&E's exit strategy out of management's hands.
After years of disastrous wildfires linked to PG&E
equipment, the company sought court protection in January and is
attempting to cobble together an agreement on how it can tackle
billions of dollars of death, injury and property damage
claims.
Closed-door talks aimed at creating a bankruptcy plan with broad
creditor support are under way. Fire victims said in court papers
the insurance settlement is impeding those talks because it would
tie up too much of PG&E's cash.
The insurance proposal is scheduled for discussion on Wednesday
in the U.S. Bankruptcy Court in San Francisco.
"There are serious issues before the judge this week that impact
the fair administration of justice and the treatment of victims who
are the least able to protect themselves," said Robert Julian, a
lawyer representing the official committee of wildfire victims in
PG&E's bankruptcy. "Hedge funds and insurance companies are
trying to make billions of dollars of profit at the victims'
expense."
The committee filed court papers on Friday arguing that wildfire
victims must be prioritized over and repaid ahead of insurance
claims in any chapter 11 plan.
Gov. Newsom also challenged the insurance proposal as "unfair
and inequitable, unreasonable, not in the best interests of the
estate, anticompetitive or otherwise objectionable.".
Some of the $11 billion cash payout would go to insurance
carriers to compensate them for insured losses stemming from the
wildfires. Cash would also flow to hedge funds that bought
insurers' claims against PG&E at discounts, usually for less
than 50% of the face value.
In a statement, a group of insurance creditors said they had
agreed to take less than the full amount PG&E owes them to help
the company out of bankruptcy. PG&E has pointed to the
insurance deal as proof it is making progress in assembling support
for its chapter 11 strategy.
Fire victims view the settlement as an obstacle to peace, saying
it would force people who lost homes, businesses and loved ones to
the fires to accept as compensation securities issued by the
company they believe wronged them.
The controversy spotlights the investment strategies that big
financial institutions use to cash in on corporate bankruptcy
cases. Some of PG&E's biggest shareholders stand to profit if
the proposed insurance settlement goes through, according to court
papers filed by the fire victims. Nearly half of the insurance
claims are in the hands of nine investment funds that own, in
combination, about 19% of PG&E's stock, according to the
papers.
Insurers have paid out about $16 billion to victims of the
California wildfires, enough to unsettle their own balance sheets.
Except for government aid and some recent emergency payments from
PG&E, the insurance payouts are the only fire damages most
victims have collected so far.
Many insurers sold off their claims against PG&E in the
secondary market to investors like Baupost Group LLC, which owns
more than $6 billion worth, and Abrams Capital Management, which
owns $72 million. Baupost also owns 4.6% of PG&E's stock and
Abrams owns 4.7%, according to court papers.
Cross-investing at various places in a bankrupt company's
capital structure is a standard distressed investing strategy.
PG&E has long been a target of criticism in California for
paying out dividends instead of investing in improved safety for
its aged power lines and poles.
If the insurance settlement goes through as proposed, Baupost
would make a sizable profit -- enough to offset the paper losses it
has taken on its stockholdings as PG&E's shares plunged.
PG&E's share price isn't holding up well under the pressure
of bankruptcy, where the company's plan faces competition from a
rival chapter 11 scenario backed by bondholders in an alliance with
fire victims.
Write to Peg Brickley at peg.brickley@wsj.com
(END) Dow Jones Newswires
November 11, 2019 09:04 ET (14:04 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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