Big Progress in Big Cases: PG&E and Puerto Rico are Making Strides Towards Achieving Creditor Consensus
There has been considerable progress towards resolution in two of the largest bankruptcy cases pending in the United States: the Commonwealth of Puerto Rico and the California utility, Pacific Gas & Electric.
Several months ago, we reported on the framework of a plan of adjustment for the Commonwealth that was reached on the heels of a request by the Oversight Board to invalidate $6 billion worth of general obligation bonds on the grounds that the bonds issued in 2012 and 2014 violated the terms of Puerto Rico’s constitution and therefore were never valid. That deal would have provided for the Commonwealth’s General Obligation or “GO” bonds issued pre-2012 to receive 64 cents on the dollar, while the 2012 and 2014 GO bonds would have had the option to accept 45 cents on the dollar and 35 cents on the dollar, respectively, or to continue to litigate the validity of their claims to seek a recovery on par with the pre-2012 bonds. That all changed on the evening of February 2, when the Oversight Board announced that it had reached a new deal, supported by “significantly more . . . bondholders” than the prior deal, that will resolve the lawsuits commenced in January, provide a larger up-front payment to bondholders but shorten the duration of the Commonwealth’s obligations to them, and give all three groups of general-obligation bondholders better recovery rates. Those who were initially promised 64 cents on the dollar will receive 74.9 cents, those offered 45 cents will receive 69.9 cents, and those offered 35 cents will receive get.4 cents.
The agreement forecloses the threat of contentious, costly and protracted litigation between the Commonwealth and an array of sophisticated investors, and may pave the way for a smoother exit from bankruptcy. But significant hurdles remain. There are other bonds outstanding that are not subject to the deal, and there remain $50 billion in pension obligations to retired workers that must also be addressed as part of any debt-adjustment plan, not to mention certain approvals that are still required, including from the Puerto Rico legislature and, of course, Judge Laura Taylor Swain herself.
Less than 48 hours after the Oversight Board published news of its revised deal and support from the GO bondholders, Judge Dennis Montali issued an important ruling in the PG&E case. For months, PG&E’s efforts to achieve confirmation of a plan in time to participate in a California-sponsored wildfire prevention fund have been threatened by a competing plan of reorganization proposed by certain of the utility’s bondholders. With the clock ticking, PG&E reached an agreement with the bondholders to drop their competing 11 plan and support PG&E’s plan, in exchange for improved treatment under the plan and the debtor’s agreement to pay certain of the bondholders’ professional fees.
The settlement with bondholders, coming just a few months after the debtors reached a deal with wildfire victims regarding the treatment of their claims in the bankruptcy case, marks significant progress for PG&E towards confirmation of a plan and emergence from bankruptcy. But, like Puerto Rico, PG&E still faces hurdles. The plan must be voted on by creditors, is subject to review by the California Public Utilities Commission, and has been the target of frequent criticism by California Governor Gavin Newsom.
We will continue to monitor both of these cases and provide further updates as they draw closer to a conclusion.
 Pedants may be quick to point out that the Commonwealth’s case is not technically a bankruptcy case because it was not filed under any Chapter of Title 11 of the United States Code. But this is largely a distinction without a difference: Section 2161(a) of the Puerto Rico Oversight, Management, and Economic Stability Act provides that all or parts of 98 different Bankruptcy Code sections apply to the Commonwealth’s case.