PG&E gains $23bn financing approval to fund bankruptcy settlement

Pacific Gas and Electricity (PG&E), the wildfire stricken California focused electrical utility operator, has been approved to secure $23 billion of financing to assist in paying its bankruptcy related settlements, which may further accelerate the awaited subrogation payments it owes rights holders.

Yesterday the bankruptcy court approved PG&E to secure and use up to $23 billion in financing arrangements to help pay for the Chapter 11 turnaround plan, which includes making payments to those it owes money to for settlements following the major wildfires in California of 2017 and 2018.

The approval came as Gavin Newsom, the Governor of the State of California, reversed his opposition to the financing plans, opening the doors for PG&E to proceed with its bankruptcy plans and begin the process of securing some $11 billion in debt financing, $9 billion of equity raises and $3 billion by issuing new shares.

Newsom had objected to PG&E’s plans, but dropped his objection partly as the resubmitted timeline and plans proved more agreeable, but also it has been reported that recent financial market volatility may have helped to further reduce his opposition after PG&E secured commitments from some large investors to back the financing.

These investor commitments amount to around $12 billion Associated Press reported and have encouraged the judge and Newsom that the financing plan is realistic and can be proceeded with.

This financing approval was an important step in ensuring that PG&E can honour its settlement obligations, which includes a $13.5 billion settlement to resolve all claims with individuals arising from 2017 and 2018 wildfires, including the 2017 Tubbs Fire, as well as claims arising from the 2016 Ghost Ship Fire in Oakland and the 2015 Butte fire, as well as the $11 billion settlement with the holders of insurance subrogation rights.

As we explained recently, PG&E said that its Chapter 11 bankruptcy plans are on track and as a result it hopes to join the state’s newly formed wildfire fund and also make progress towards the insurance subrogation payments that it owes.

Some of those subrogation payments are expected to flow to the benefit of reinsurance market participants, which may include retrocessionaires and also insurance-linked securities (ILS) funds.

PG&E agreed the subrogation settlement of $11 billion last October, which is expected to provide some benefit to reinsurance providers, including some insurance-linked securities (ILS) funds that were exposed to the losses from major 2017 and 2018 California wildfire events.

Insurance and reinsurance companies, ILS funds and retrocessionaires paid some $20 billion of losses between them for the damages from these wildfires, which PG&E was subsequently found liable for as its equipment sparked the blazes.

It may still be some months before insurance and reinsurance market participants, as well as other rights holders, begin to receive any subrogation payments through PG&E’s settlement.

But this financing approval is another step down the road to seeing the payments happen and so brings any benefits closer for ILS funds and other collateralised reinsurance players that stand to benefit from reductions in re/insurer’s ultimates related to the wildfires.

The challenge of valuing these subrogation benefits remains significant, as we explained recently here, as for ILS managers valuing the PG&E wildfire related subrogation settlement in their funds will continue to be a challenge until they begin to flow.