PG&E Corp. PCG -1.33% ’s settlement with victims of wildfires has wrong-footed a group of bondholders who want to take over the company and could force them to re-evaluate their legal strategy, people familiar with the matter said.
Bondholders including Elliott Management Corp. and Pacific Investment Management Co. are evaluating the impact of the settlement on their plan to restructure PG&E in bankruptcy court, one of the people said. If bondholders determine their plan has become less practicable, they will focus more on a complex litigation scheduled to start this week that could boost the value of their claims against the California electric utility by as much as $2 billion, the person said.
By settling Friday with fire victims, who had been allied with bondholders, PG&E bolstered support for its plan, which would keep control in the hands of large shareholders such as Abrams Capital Management LP.
Settling with wildfire victims could speed the passage of the shareholder plan in bankruptcy court, but the company must also meet legislative requirements and obtain committed financing and regulatory approval.
“The bond market is telling us the company’s plan has a much higher chance of going through,” said Andrew DeVries, a utility analyst at CreditSights.
PG&E’s bond due in 2034 traded around 105 cents on the dollar last week, compared with about 115 cents two months ago, according to MarketAxess. The stock, which dropped dramatically during wildfires in October, has recovered to about $10 as expectations have grown that the company’s shareholder-backed plan will succeed.
Much depends on California Gov. Gavin Newsom’s response to the settlement and whether he supports the bondholder proposal or the restructuring plan put forth by PG&E and its shareholders.
Bondholders are also waiting to see if the settlement precludes wildfire victims from negotiating further with their group, the person familiar with the matter said. Such a restriction would make the bondholder proposal less viable, he said. PG&E is expected to disclose details of the deal Monday, people familiar with the matter said
The settlement has raised the stakes of a parallel legal gambit bondholders have made to boost their payouts.
Lawyers for the bond group are scheduled to argue in hearings Wednesday and next month at a San Francisco bankruptcy court that PG&E must pay bondholders what they would have been entitled to absent a bankruptcy. That is because it is a solvent business that only sought court protection because of fire liabilities, the lawyers contend.
The restructuring plan proposed by the company rejects those claims, which could be worth as much as $2 billion.
“Until these issues are addressed and resolved, the ultimate structure of the company’s chapter 11 plans remain up in the air,” CreditSights said in a research report last week.
The argument is arcane—it hinges on competing interpretations of the interest rate PG&E must pay on its bonds—but it has become crucial to how much the funds will make on their investments. It will also influence how much debt the utility must carry when it leaves bankruptcy court protection. The more PG&E owes its creditors, the more it must raise with new debt and stock sales to pay them.
Under the bondholder interpretation, PG&E would owe accrued interest on its bonds at the original contract interest rate—6.05% on the bond due in 2034—as opposed to the federal judgment rate of about 3% paid by many bankrupt companies, analysts said. Winning on that point would entitle bondholders to about $550 million more when the company exits bankruptcy, but it is unlikely given legal precedents, the analysts said.
The bondholders are on stronger legal footing in their argument that PG&E must pay a premium for retiring their bonds early, or leave them outstanding at the contract interest rate after bankruptcy, the analysts said. That would boost the value of the 2034 bond over 120 cents on the dollar and increase the overall recovery for bondholders by about $1.5 billion, they said
Mr. Newsom’s staff is expected to provide feedback in coming days on how well the competing restructuring plans adhere to a law California passed over the summer to stabilize its utilities amid increased wildfire risk, people familiar with the matter said. The governor could reject either plan or both and demand changes to increase fire safety and avoid any rate increases for electricity customers, the people said
The governor will be looking for a mechanism by which public board members would gain even more decision-making power within the utility if it fails to meet certain safety metrics, including liability in any future fires, a spokesperson for the governor said.
—Andrew Scurria and Christine Mai-Duc contributed to this article.
Write to Matt Wirz at matthieu.wirz@wsj.com
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