Vanguard holds half of PG&E $920 million municipal bonds

As the California utility moves toward bankruptcy, yields on its munis have risen among active trading

Jan 15, 2019 @ 11:47 am

By Bloomberg News

The Vanguard Group holds about $415 million of municipal bonds issued on behalf of PG&E Corp., about half of the $920 million state and local debt sold for the California utility that's edging toward bankruptcy because of the fallout from devastating wildfires.

Some tax-exempt bonds PG&E issued through state and local conduits have slid amid the talk of bankruptcy, raising the risk that even debt that was issued through government agencies may not be paid back in full.

Freddy Martino, a spokesman for Vanguard, said that all but $2 million of the bonds held by Vanguard are backed by banks that act as buyers of last resort for the securities, insulating the money manager from risk.

Mr. Martino declined to comment on PG&E's impending bankruptcy, though he said the company's holdings have declined about $15 million since its filings at the end of December.

As of Dec. 31, Vanguard held $227.9 million of PG&E debt in its $5.6 billion California Municipal Money Market fund, according to data compiled by Bloomberg. It held another $110 million of PG&E's debt in its California intermediate and long-term funds and $94.5 million in its $18.3 billion national money market fund.

Yields on PG&E floating-rate rate bonds issued by California's Pollution Control Finance Authority rose to 3.5% Monday from 2.5% Friday. Such bonds trade at par because banks agree to buy the debt periodically if other investors won't.

On Monday, California Assemblyman Chris Holden, the chair of the chamber's utilities and energy committee, said he would no longer pursue a bill that would have let PG&E issue bonds to cover billions of liabilities from Northern California's Camp Fire, the deadliest in state history, after the company said it is preparing for a potential bankruptcy.

Bankruptcy risk spurs trading surge

PG&E's securities were the most actively traded in the $3.8 trillion municipal-debt market Monday, when investors unloaded its floating-rate bonds, which can be resold at face value before it seeks court protection from creditors.

The price of bonds issued through the California Infrastructure and Economic Development Bank that are backed by the utility's revenue have tumbled to an average of 80.1 cents on the dollar from 90.1 cents in mid-December, according to data compiled by Bloomberg.

As PG&E moves toward seeking court protection from its creditors for the second time in as many decades, after the deadliest fires in California history left it facing as much as $30 billion of liabilities, the company has seen two-thirds of its stock market value wiped out.

"It looks like a binary bet at this point to us," said Stephen Shutz, a portfolio manager at Brown Advisory, which doesn't own any PG&E-backed muni bonds. "Either you're betting on them getting bailed out by the state or they're going to file and the bonds probably have more downside and further pain before there's a resolution."

Analysts from UBS Financial Services told clients in a Jan. 10 note that municipal bonds backed by the utility could see pricing volatility if PG&E is held liable for claims related to the wildfires in 2017 and 2018.

Over the weekend, PG&E CEO Geisha Williams stepped down, and the company said it will file for a Chapter 11 bankruptcy by Jan. 29, after giving the required 15-day notice to its employees, according to filing at the Securities and Exchange Commission.

(More: Banks continue to unload munis in third quarter)

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