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PG&E intends to file for bankruptcy on January 29th. They state it is largely due to the estimated $30 billion in liabilities from the recent disasters, fire suppression costs, and attorney fees.

How can they file for bankruptcy now, when they haven't even been found liable for anything yet?

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    I'm voting to close this question as off-topic because this is a legal (or perhaps political) question, not a question about personal finance. – NL - Apologize to Monica Jan 15 '19 at 16:03
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    @NathanL there are a lot of questions on here that are not personal finance related. I thought this SE was about Personal Finance AND money. – Anthony Genovese Jan 15 '19 at 18:34
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    @NathanL PG&E is a public company, there are tons of questions and answers here related to determining the financial stability of public companies for personal investing. This question is about debt markets and it is important for individual investors to understand how to look up public company documents and how markets work. – quid Jan 15 '19 at 19:18
  • On what planet is this question about economics? – quid Jan 15 '19 at 19:51
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    @quid, I definitely agree that this is not a question about economics, and I generally agree that we should allow questions about how public companies work. I think the wording here doesn't provide a good general question. I think your answer better generalizes the issue, and I will withdraw my close vote. – NL - Apologize to Monica Jan 15 '19 at 20:55
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As of the most recent quarterly filing the company had $42 billion dollars of long term debt. The issue is the bond market knows the liabilities are coming and the company is all but incapable of issuing new debt at terms that are reasonable or sustainable. Rather than waiting for the death spiral the company is going in to bankruptcy court to restructure its liabilities.

This is the most recent current report indicating the chapter 11 filing

Note the last bullet point on the second page regarding the bankruptcy:

  • assure PG&E has access to the financial resources necessary to support ongoing operations and enable PG&E to continue investing in its systems, infrastructure and critical safety efforts, including investing in its Community Wildfire Safety Program, an additional precautionary measure implemented following the 2017 Northern California wildfires to further reduce wildfire risk.

So when you scroll through and read a bit you get to this part:

PG&E does not intend to make the interest payment of approximately $21.6 million due on January 15, 2019, with respect to its outstanding 5.40% Senior Notes due January 15, 2040 (the “2040 Notes”). Under the indenture governing the 2040 Notes, PG&E has a 30-day grace period to make the interest payment before triggering an event of default.

Then a little farther down you get to the real reason:

PG&E believes that it currently could access, outside of a restructuring under Chapter 11, a significant amount of capital, but only in the form of secured indebtedness, using the Utility’s assets to secure such additional funding, or in more esoteric forms of alternative capital that would be relatively dilutive or expensive. The amount of any such additional secured indebtedness would be limited, however, by covenants applicable to the Utility’s outstanding securities and credit agreements (including limitations on permitted secured indebtedness and a maximum ratio of total consolidated indebtedness to total consolidated capitalization), and the amount of that additional secured indebtedness could be reduced by significant accounting accruals that the Utility may incur with respect to the Camp Fire. Nevertheless, PG&E could extend its liquidity for an extended period of time by using its assets to secure the issuance of additional capital or by accessing such forms of alternative capital. After a thorough review with management and financial and legal advisors, PG&E’s boards of directors have concluded, however, that issuing substantial amounts of secured indebtedness or accessing such forms of alternative capital to extend PG&E’s liquidity outside of a restructuring under Chapter 11 is not in the best interests of PG&E and its stakeholders, and would not address the fundamental issues and challenges PG&E faces, including:

Basically the company is saying 'our credit is so bad right now that while we CAN secure new funding the terms would be terrible. In continuing on with terrible financing terms we'd probably breach agreements that exist in already existing debt which would cause that debt to be callable, then the domino effect of that would spiral us in to oblivion.'

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  • So the Camp Fire isn't the primary driver for bankruptcy? Even though that is how it is being talked about in the media. – Anthony Genovese Jan 15 '19 at 14:45
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    @AnthonyGenovese That's a misreading of the answer, I think. The first impact the Camp Fire liabilities are having is that people won't lend money to PG&E at the rates they previously would've been comfortable with, which means they can't borrow money to service their existing debts at a sustainable rate. – ceejayoz Jan 15 '19 at 15:53
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    @AnthonyGenovese the primary driver is the fire. PG&E's existing debt has certain performance clauses like "we will never have a higher than X debt to asset ratio" and taking on the new debt, particularly given the uncertainty of the fire liability, would essentially require the company to breach agreements that are in place with existing creditors. The bankruptcy will allow the company to renegotiate those various performance terms with existing creditors in order to secure the debt required to meet the fire liability without triggering a death spiral of performance clause breaches. – quid Jan 15 '19 at 19:14
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    Thank you @ceejayoz and quid. That makes sense to me now. – Anthony Genovese Jan 15 '19 at 20:17
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They know the lawsuits and liability are coming. If they expect to have liabilities that will exceed their ability to pay and continue operating, they will have to file bankruptcy at some time.

Think about what happens if they wait to do this. How long do they wait? Say there's a few lawsuits that they are required to pay out. Do they pay them out? Does that mean the people who go to court first get 100% payout and the people who go to court later don't? That's not fair.

The responsible thing to do is to arrange bankruptcy protection as soon as you have to pay out money to someone who you don't think would get 100% of the money you owe them in a bankruptcy proceeding. Otherwise, you advantage the people who get paid first over those who would get paid later, and that's not good.

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Companies (like pg&e) declare bankruptcy before actually incurring the anticipated debt from lawsuits. That way all new debt typically gets treated in the same class as “unsecured debt”. Senior secured debt typically gets repaid 100%. All other unsecured debt generally gets treated the same way, so if the company can only repay 80% of that unsecured debt, that debt is restructured as debt at a reasonable rate once emerging from bankruptcy. The remaining 20% of “unpayable” debt is converted into equity shares of the new company. Sometimes, the company can actually repay 100% of all debt if the debt’s interest rate is low enough. In this case, a portion of the equity shares in the old company can actually still be worth something. The uncertainty in PCG’s share price is grappling with this question right now. For example, PCG could possibly service an additional $15B (but probably not $30B) of lawsuit debt if it is restructured at a reasonable rate of, say, their long-dated WACC of 3.25%.

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