PG&E Corp bondholders, including Elliott Management Corp, Pacific Investment Management Co and Oaktree Capital Management, will collect a lower-than-normal interest rate while the utility is in bankruptcy.
The bondholders lost their fight to keep the rates set in debt contracts on about $17.5bn in notes that PG&E issued in the years before filing bankruptcy. As long as PG&E remains under court protection, interest accrues at the so-called federal judgment rate, or 2.59%, US Bankruptcy Judge Dennis Montali said in an opinion filed late Monday night. PG&E shares rose as much as 2.4%.
The ruling is another victory for PG&E just as it begins the most legally-complicated phase of its bankruptcy case. So far, the company has convinced wildfire victims, fire insurers and a block of local governments to back PG&E’s reorganisation instead of an alternative plan pushed by bondholders.
Now PG&E must defend that reorganisation from legal attacks the bondholders will make before Montali. The utility must also win support from California Governor Gavin Newsom.
“We are pleased with the court’s decision, which confirms that the interest rate terms outlined in our plan of reorganisation comply with existing law,” PG&E said in a statement. The company said it remains on track to get its plan confirmed ahead a state-imposed deadline of June 30, 2020.
A spokesman for the creditor committee representing the bondholders declined to comment. Montali’s ruling leaned on 17 years of bankruptcy cases in California. In that time the rule has been clear, he wrote: “Unsecured creditors of a solvent debtor will be paid the federal interest rate whether their pre-petition contracts call for higher or lower rates.”
PG&E has claimed using the lower rate would save it $500mn. The fight over interest is closely tied to a more expensive, multi-billion dispute over whether PG&E must pay a so-called make-whole premium to bondholders. PG&E claims that payment would an unfair, $5bn windfall for holders of the debt.
Creditors say if their bonds were refinanced outside of bankruptcy, PG&E would have to pay the make-whole.
Montali has not yet ruled on that dispute. PG&E filed bankruptcy on January 29 to deal with about $30bn in wildfire claims linked to the company’s equipment. Since then, bondholders have fought to impose a new reorganisation plan on PG&E that would hand them a big slice of the company’s equity and possibly preserve the current interest rates they are collecting, some of which are above market.
PG&E bonds fell, with its 6.05% senior unsecured notes maturing in 2034 dropping 1.75 cents on the dollar to 104.75 cents in New York, according to Trace data.
The ruling is a setback for the bondholders who have been unable to stop PG&E from cutting deals that support the company’s reorganisation plan. Under that plan, the bonds would be refinanced, likely at lower interest rates, and shareholders would keep a bigger slice of the equity.
The case is PG&E Corp 19-bk-30088, US Bankruptcy Court Northern District of California.
PG&E headquarters in San Francisco, California. PG&E bondholders, including Elliott Management Corp, Pacific Investment Management Co and Oaktree Capital Management, will collect a lower-than-normal interest rate while the utility is in bankruptcy.
