PCG PG&E Corporation

By Peg Brickley 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 26, 2019).

An indication from PG&E Corp. that it might restrict trading in its debt has set alarm bells ringing among distressed investing funds that have swarmed around the California utility's mega-billion-dollar bankruptcy case.

Papers filed in U.S. Bankruptcy Court in San Francisco in recent days warn of threats to the market where PG&E's bonds are being bought and sold if the utility pursues one of many potential paths to getting out of chapter 11.

Valuable tax breaks could be at risk if there is too much trading in PG&E's debt, which could trip triggers in Internal Revenue Service rules, the company said. Some $4 billion in net operating losses are available to offset taxable income but, under the tax code, that could be reduced if too much stock or debt changes hands. PG&E is asking a judge to consider limiting the trading action, and bondholders are fighting back.

"The requested relief not only directly impairs the rights and interests of the claimholders, it also threatens market liquidity," wrote lawyers for an unofficial committee of unsecured bondholders. The official committee that represents all unsecured creditors, including bondholders, said PG&E is moving too soon to head off a threat that may never materialize, and trampling creditors' rights in the process.

"The relief requested today may cast a shadow of uncertainty, create an overhang on the market and trading of the senior notes and disrupt the trading or liquidity of the senior notes," BOKF N.A., a trustee for more than $17 billion in bond debt, said in a separate filing.

PG&E wants the right to set limits on major trades in debt, as well as stock, to safeguard against tax-law restrictions on change in ownership. The company hasn't determined the shape of its bankruptcy exit plan, but it is possible creditors could be given stock in exchange for their debt, which could affect the calculus for ownership changes.

The proposed trading restrictions will be up for review this week, at the San Francisco utility's second major court hearing after its January decision to file for chapter 11 protection. A representative for the company declined to comment.

Hit with lawsuits from thousands of people with damage claims stemming from years of wildfires, PG&E filed for bankruptcy without a clear path to get out. It is expected to reorganize, but the form of that reorganization is up in the air.

PG&E's bankruptcy has multiple moving parts, from figuring out the wildfire damages to dealing with big power contracts. Each dispute will be an investment opportunity for traders, a chance to make money as prices rise and fall in response to developments in the courtroom.

One of the first names to pop up on PG&E's court docket in San Francisco was Seth Klarman's Baupost Group LLC, a hedge fund that made hundreds of millions of dollars trading in Westinghouse Electric Co.'s debt during the company's bankruptcy case. Not far behind was Paul Singer's Elliott Management Corp., another hedge fund adept at profiting from trades in the debt of bankrupt companies.

Business claims, too, will be traded during PG&E's bankruptcy, as suppliers owed money by the utility look to limit their risk by selling their bankruptcy claims to distressed investors amassing stakes.

It is against that backdrop that PG&E is asking preapproval for trade limits that will only kick in if its path out of chapter 11 is one that will set off complex triggers in federal tax law.

Write to Peg Brickley at peg.brickley@wsj.com

(END) Dow Jones Newswires

February 26, 2019 02:47 ET (07:47 GMT)

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