American Utility company PG&E who recently filed for Chapter 11 bankruptcy saw its stock rise by almost 16% on Tuesday. Despite the gains recorded by the power company, one hedge fund manager believes the recent surge raises false hope in investors, as it will “go to zero” really soon.
George Schultze, founder and chief investment officer of Schultze Asset Management, an investor in distressed securities said the recent spike in the price is based on speculation that the California legislature and the California Public Utility Commission (CPUC) would help them out. However, according to Schultze, this might not be the case.
Schultze told news outlet Barron’s, at the Context Summits Miami conference that:
99.75% of the time, shareholders get nothing when a company goes bankrupt. But there’s false hope that won’t be the case this time. A key part of that speculation is you have to assume the California legislature and California Public Utility Commission will bail you out. And here there is such aversion to that kind of deal.”
Adding that, this might not be the case as the recent Camp Fire has a lot of political undertones, which makes it “more challenging than most cases to grant any recovery at all to shareholders.
Schultze backed up his theory with a recent hearing before the CPUC, where protesters from the Democratic Socialists of America (DSA) asked the government to acquire the company.
At the hearing, members of the DSA said the Chapter 11 filing by PG&E provides the state with an opportunity to restructure the energy system. Seth Sanders, one of the DSA member at the hearing, said it was disheartening to see corporations seek protection when they are suspected to have been complicit in the wildfire that killed over 86 people and scorched thousands of properties in Paradise town.
“This is a terrible insult to the memories of the dead,” Sanders informed commissioners at the hearing.
Some of the protesters asked the court to restructure the utility firm into a municipal system, using the Sacramento Municipal Utility District (SMUD) as a case study. The SMUD was created by a vote of Sacramento County residents in 1923 and its until this day, governed by a seven-member Board of Directors elected by residents.
Investors are playing the waiting game with PG&E. For some, there is a good chance the company’s bankruptcy filing won’t be accepted in court because the company is solvent.
According to Morgan Stanley analyst Stephen Byrd, the company’s filing shows it has $880 million of cash, as at January 28, but it seems the utility company filed “Chapter 11 to achieve tactical litigation advantages.”
“Bankruptcy law includes a ‘good faith’ Chapter 11 filing requirement, in which the debtor (PG&E) must not be filing for reasons inconsistent with the reasons Chapter 11 was created. For example, if the debtor is solvent but is choosing to file Chapter 11 for tactical litigation advantages, such a filing is prohibited,” he noted.
Even so, if the court rejects PG&E’s bankruptcy, that ignores the ‘fundamental risk of potentially open-ended fire liability’ that comes with the state’s “inverse condemnation’ rule, the analysts write. As a reminder, that rule means the state can hold investor-owned utilities liable for fires that their equipment helped start, even if the company wasn’t negligent.
A recent California law passed last year, also gives investors hope for a brighter tomorrow. The rules allow utility companies to pass on wildfire costs to ratepayers, and in some individual cases issue bonds to cover the costs. Invariably, shareholders might not end up paying for the liabilities for last year’s Camp Fire that destroyed lives and properties in California.
Last modified: March 4, 2021 2:30 PM