PG&E Files Bankruptcy

Several weeks ago, we discussed the possibility that PG&E might file for bankruptcy. Yesterday, PG&E made it official with its bankruptcy filing. PG&E listed assets of about $71 billion and liabilities of about $52 billion in its filing. The advantage of bankruptcy for PG&E is that it will slow down lawsuits that have been filed or will be filed in relation to recent wildfires in California. It is estimated that the company faces about $30 billion in claims from these wildfires. PG&E may take up to two years to emerge from bankruptcy.

Tesla Bond Coming Due

As we discussed in the textbook, there are many different types of bonds. Tesla has a bond coming due that is a convertible bond, but can be settled in cash and stock only if certain conditions are met.  At maturity, the cash component of the Tesla bond repayment is calculated by calculating a weighted average price for the 20 trading days prior to February 26, multiplied by a conversion ratio of 2.7788. The maximum cash payment is $500 per $1,000 bond, with the remainder paid in Tesla stock. However, for the stock component to become part of the settlement, Tesla stock needs to rise to about $360, a 21 percent increase in stock price. Unless the stock price hits this level, Tesla will be forced to settle the entire $920 million bond issue in cash.

Underwriting Risk

While some people are amazed at the money earned for underwriting stock offerings, it can be a risky business. Credit Suisse recently underwrote a 10 million share secondary offering for Canada Goose, known for its expensive coats and parkas. When the offering was made, in an unrelated incident, Huawei Technologies finance chief was arrested in Vancouver, sparking a diplomatic dispute between Canada and China. The arrest led to a Chinese boycott of Canadian brands, sending Canada Goose shares down by 20 percent. Credit Suisse was forced to sell the shares at a loss to the offering price or risk a further decline in the stock price. Reportedly, Credit Suisse lost $60 million on the transaction.

Lehman's Bankruptcy Tally

The Federal Reserve Bank of New York released a final (hopefully) estimate of the cost of the Lehman Brother's 2008 bankruptcy filing and the numbers are staggering. Compensation and benefit costs amounted to $1.97 billion, professional and consulting fees were $2.56 billion, and other operating expenses were $1.37 billion, for a total of $5.9 billion! This does not include the $1.36 billion paid out for the Security Investors Protection Act (SIPA)claims. While the bankruptcy costs (excluding SIPA claims) were about $6 billion, the number appears to be in line with other bankruptcies. Research indicates that bankruptcy costs are generally 1.4% to 3.4% of a company's pre-bankruptcy value. For Lehman, which had $300 billion in assets, bankruptcy costs were about 2% of assets.

Sears Bankruptcy

Sears survived the Great Depression and two world wars, but couldn't survive internet shopping. As a result, the company was forced to file bankruptcy and now it is going to get expensive. Lehman Brothers 2008 bankruptcy cost more than $2 billion, while the Toys R Us bankruptcy in 2017 has cost $375 million to date and still counting. In the Sears bankruptcy, at least 36 lawyers are charging more than $1,000 per hour. The company has employed six law firms, three investment banks, two financial advisors, and seven others who are providing tax, real estate, and other bankruptcy services. One law firm has already billed more than $5 million in the first two weeks of bankruptcy. 

Portfolio For 2019-2028

One thing that students seem to really get interested in during class are market returns and portfolios. Recent commentary from the well-known investment advisory and mutual fund company Vanguard can provide some food for thought. First, notice that Vanguard estimates the annual return on U.S. stocks will be 4 to 6 percent over the next decade. This is significantly lower than the historical annual return of about 12 percent. Second, Vanguard is recommending that investors allocate 40 percent of equities to international stocks, up from the current recommendation of 30 percent. The reasons for Vanguard's recommendation is based off lower fees for international investing, resulting in higher returns for investors, and the company's projection that international stocks will outperform domestic stocks over the next decade.

PG&E: A Fallen Angel

Yesterday, we posted about the possibility of PG&E filing for bankruptcy due to potential liability for the November 2018 California wildfire. Today, PG&E bondholders got bad news as S&P dropped the company's bond rating from BBB- to B, firmly in the junk bond category. The downgrade was attributed political and regulatory pressure, as well as the potential liabilities from the wildfire. S&P stated that the bond rating could be further lowered if PG&E did not articulate steps to preserve credit quality.

Happy Birthday To The TCJA!

One year after the passage of the TCJA of 2017 and analysis of the effects of new tax code has begun. For example, capital investment by S&P 500 companies increased by 8.9 percent in 2018, the highest growth rate in seven years. And Deloitte estimates that the new tax code will increase real GDP by .7 percent per year over the next 10 years. While the boost may not be as high as proponents had hoped, it is important to remember that several provisions of the TCJA, such as the Global Intangible Low Taxed Income, the Base Erosion and Anti-Abuse Act, and the limitation business interest expense, actually increased taxes.

GE's Loss Of Goodwill

General Electric just announced a $22 billion write-off related to the company's 2015 acquisition of the power grid business from Alston SA. The Alstom purchase was made for $10.1 billion, so GE wrote off more than twice the original purchase price. What makes this is write off unique is that GE is writing off previously unrecognized intangible assets. This means that previously misvalued or unrecognized intangible assets were not recognized in accounting for the acquisition.

PG&E Bankruptcy?

In early November, the deadliest wildfire in California history broke out. And while the exact cause has not been determined, the California Department of Forestry and Fire Protection is investigating power lines operated by PG&E as a possible cause. PG&E was previously blamed for a fire that occurred in 2017 and had to issue bonds to pay for claims from that fire even though the state has not issued a report on the cause of that fire. In the textbook, we mentioned that at one point, Continental Airlines filed bankruptcy in order to reduce labor costs. Now, there is a possibility that PG&E may use the bankruptcy process to seek relief from possible financial claims arising from the 2018 fire.

Buffett Bets On Interest Rates

Famed investor Warren Buffett has made a bet  on interest rates. Recently, Berkshire Hathaway issued 30-year fixed rate bonds to pay for existing bonds that were maturing. And while this is a common practice for many companies, what made this interesting is the the maturing bonds were floating rate coupons. Floating rate bonds benefit the a company when interest rates are falling since the coupon payments will decline, while increasing the coupon payments when interest rates are increasing. While no statement on the reason behind exchanging fixed rate bonds floating rate bonds was made by the company, it could be an indication that Mr. Buffett believes that an increase in interest rates is more likely than a decrease.