One day after investors were stunned when troubled California utility, PG&E, drew down the full available balance of its revolving credit facilities, sending the stock into a tailspin, the pain has continued and on Thursday, PG&E shares extended losses, last down more than 21%, and tumbling more than 50% in the past week, with Mizuho the latest bank to cut its price target, saying company could face wildfire-related liabilities of $13 billion
To be sure, things aren't looking good: as Bloomberg reports, 15 minutes before a fire was reported among the trees north of Sacramento - the spark that would explode into the deadliest blaze in California history - a PG&E power line in the area went offline. A week later, at least 56 people have been found dead - and PG&E Corp. is facing its gravest crisis yet over whether its equipment has ignited another devastating wildfire.
While the exact cause of the fast-moving Camp Fire may not be known for months or even years, in Sacramento and on Wall Street, the reckoning for PG&E is already at at hand.
After limping out of bankruptcy in 2004, California’s largest utility is once again under pressure. Underscoring its financial straits, PG&E said late Tuesday that it had exhausted its revolving credit line. It also said that if it’s held responsible for the fire that destroyed the town of Paradise, the liability would exceed its insurance coverage.
That comes as the company is already facing as much as $17 billion in liabilities, according to a JPMorgan Chase & Co. estimate, from a swarm of wildfires that charred parts of Northern California wine country last year. State investigators have blamed PG&E equipment for sparking 17 of last year’s blazes. A report on the most destructive of those is still outstanding.
The reason the stock is collapsing is that with two sets of devastating and deadly fires within 13 months, Wall Street is confronted with the question how PG&E can sustain billions of dollars of liabilities that could keep piling up. The San Francisco-based company lost about $12 billion in market value since the Camp Fire started through Wednesday, when it the shares plunged the most in 16 years. Holders of $18 billion of bonds that are currently rated investment grade, are bracing for the utility’s credit ratings to be cut to junk, making PG&E one of the biggest "fallen angels" in years.
“Investors are understandably beginning to question the wisdom of continuing to commit capital to California’s investor-owned utilities absent a more comprehensive wildfire liability policy fix,” said Jonathan Arnold, a utility analyst for Deutsche Bank AG.
Some are even bringing up the dreaded B-word amid growing concern about the prospect, however remote, that PG&E might be forced into bankruptcy again.
“The risk of bankruptcy is very real for these guys and with each passing wildfire that risk increases,” Jaimin Patel, a credit analyst for Bloomberg Intelligence, said in an interview. “They will almost certainly need help from the state."
That is the last thing some of the smartest money on Wall Street wants to hear. As we found out in yesterday's deluge of 13Fs, in the third quarter a flurry of value investors decided to throw caution to the wind and buy up PCG stock. Some, like legendary value investor Seth Klarman added a whopping 14.5 million shares, bringing its total to 19 million as of Sept 30. Other prominent names that have gotten crushed by the collapse in PG&E stock include Viking, Blue Mountain, Appaloosa, Millennium, Silver Point, Citadel and many others who added a lot of PCG shares in the third quarter.
Meanwhile, at a time when the market is already punishing most of the 2 and 20 crowd, the following chart - one which strongly hints at an upcoming bankruptcy - is the last thing any of the names shown above want to see...
Meanwhile, things aren't looking that much better for PG&E's bonds...
... as investors pile on bets that a default may be inevitable: