The stock market didn’t make much of a move on Wednesday morning, weighing several offsetting factors that raised both positive and negative prospects for investors. A rise in COVID-19 cases in some states that have thus far not seen huge outbreaks raised some new fears about the staying power of the coronavirus pandemic, along with news of a potential second wave from the Chinese capital of Beijing. Yet economic data continued to support a more bullish outlook for a recovery. As of just before 11 a.m. EDT, the Dow Jones Industrial Average (DJINDICES: ^DJI) was up 19 points to 26,309. The S&P 500 index (SNPINDEX: ^GSPC) managed to rise just 4 points to 3,128, but the Nasdaq Composite (NASDAQINDEX: ^IXIC) posted a more significant 53-point gain to 9,949.
There’s been a lot of activity in the shares of bankrupt companies like Hertz Global Holdings, J.C. Penney, and Whiting Petroleum, with many investors not realizing the potential to lose everything involved in buying that stock. Most of the time, shareholders end up with little or nothing when a company emerges from bankruptcy, as creditors end up dividing whatever assets are left. However, there’s one company that’s about to come out from bankruptcy protection while not wiping out its shareholders, and some investors are excited about what the future might bring for this major utility company.
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Rising from the ashes
PG&E (NYSE: PCG) is the parent corporation of the Pacific Gas and Electric power utility company, and it’s been under bankruptcy protection since January 2019. The California-based company had been a stalwart in the utility industry for decades, but huge prospective liabilities from wildfires that hit the state forced the business to seek protection from creditors.
Under state law, PG&E was potentially on the hook financially for losses linked to wildfires if the utility’s equipment caused the blazes to occur. Hundreds of such fires had occurred in the 2010s, including huge ones like the Camp Fire and Kincade Fire. At the time, estimates of total wildfire-related losses were around $30 billion, dwarfing the roughly $10 billion market capitalization on PG&E’s stock. With insufficient cash reserves to pay off legal claims related to the wildfires, PG&E instead took the opportunity to work with its creditors in bankruptcy court proceedings.
As the bankruptcy progressed, some stock analysts concluded that there’d be nothing left for PG&E shareholders. Some policymakers advocated for a state takeover of the utility to ensure public access to electricity. Few believed that PG&E’s proposed reorganization plan would get the support of victims of the fires. As recently as October 2019, PG&E stock traded below $4 per share, when it seemed that creditors would get the right to propose their own reorganization plan in lieu of the utility’s recommendations.
Yet then, PG&E got a reprieve. The utility reached agreement with the bankruptcy creditors’ committee in January, paving the way for its plan to move forward. The agreement essentially set the stage for previous settlements with key groups to take full effect, including settlements with insurance companies, government entities, and individual claim holders totaling more than $25 billion.
What happens from here?
Most importantly for PG&E shareholders, the utility’s reorganization plan will allow the company to get much-needed debt financing for these settlements. That will allow the stock to retain some of its value, especially compared to the highly dilutive secondary stock offering that creditors had originally wanted to do to raise money to pay claims.
Moreover, by exiting bankruptcy protection before the end of June, PG&E will get access to a state wildfire fund. That will help protect the utility from potential future liability from wildfires yet to come.
Just because PG&E stock isn’t going to $0 following its emergence from bankruptcy protection doesn’t mean that the shares are a screaming bargain. At $11 per share, the stock is far below the $70 it fetched less than three years ago. Moreover, because of the tens of billions of dollars in debt it’ll have after it moves out of bankruptcy, the stock might well never recover to its former highs. PG&E also pleaded guilty to 84 counts of involuntary manslaughter earlier this week, tarnishing its reputation further.
Investors in other bankrupt companies will inevitably point to PG&E as evidence that some stocks do emerge from bankruptcy without wiping out shareholders. However, PG&E is a special case. Most of the time, buying shares of bankrupt companies is just throwing money away — and even when it’s not, the risk levels are often higher than the potential rewards.
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